“When dilution is the solution, we are not
at the bottom.” – Gary Kaminski (formerly from Neuberger Berman)

“Who are we kidding? We are broke! How can
we embark on new legislation for the Great Society?” – Rick Santelli (commenting
on US national health care system, at CNBC)

”Life is tough. It is even tougher if you are stupid.” – John Wayne
(born Marion Morrison)

BULLETIN: An event took place overnight Monday into Tuesday. An overnight
inter-bank loan (bank to bank) that started in the west coast United States
moved to Hong Kong, then Singapore, finally to London where it failed at
8am their time. It was large, like between $10 and $30 billion.
Major ripple effects are certain. Repeats to this event are very likely,
since not an isolated situation. My source provided a pure guess that it
was the London subsidiary of Citigroup. It was expected that the US Federal
Reserve would step in and clean up the mess. The failure was compared to
a sewage block, one that would force feces backward into the banking system
with a possible explosion soon. Colleagues were dispatched to check for
any market evidence of an event, but it is early. Banks are extremely fragile
right now, especially the largest banks.

MISCELLANEOUS MORSELS

◄$$$ ROSENBERG SWAN SONG SPEECH, A STERN WARNING $$$. One
of my favorite establishment economists is David Rosenberg of Merrill Lynch.
He is departing his post. My suspicion is either he was too competent or
ML is soon to collapse and he knows it. He wrote a good-bye resignation
letter that has been circulated. He calls the stock rally a sucker’s event,
pointing out that all economic elements are still badly in decline. Whenever
a recovery does occur, it will prove feeble in his opinion. Rosenberg
wrote:

“We believe it is appropriate to put the last nine weeks in the perspective
of the previous nine weeks. To the casual observer, it really looks like
nothing at all has happened this year, with the market relatively unchanged.
But something very big has happened, because the risk in the market,
in our view, is much higher than it was the last time we were close to
current market prices back in early January, for the simple reason that
we believe professional investors have covered their shorts, lifted their
hedges, and lowered their cash positions in favor of being long the market. Employment,
output, income, and sales are still in a downtrend. Considering what
transpired from an economic standpoint, the decline in the first nine
weeks of the year was rather appropriate in the midst of the worst three-quarter
performance the economy has turned in roughly 70 years. The rally of
the past nine weeks appears to be rooted in green shoots. While it
may be the case that the pace of economic decline is no longer as negative
as it was at the peak of the post-Lehman credit contraction, the reality
is that employment, output, organic personal income, and retail sales
are still in a fundamental downtrend…

Not until improvement in the second derivative morphs into improvement
in the first derivative with respect to the important economic data will
it really be safe to declare what we are seeing as something more than
a bear market rally, as impressive as it has been. The investing public
is still holding tightly to their long-term resolve, but much of the
buying power at the institutional level seems to have largely run its
course, in our view. That leaves us with the opinion, as tenuous as it
seems in the face of this market melt-up, that this is indeed a bear
market rally and one that may well have run its course. We have ‘round-tripped’ from
the beginning of the year and there is real excitement in the air about
how these last nine weeks represent evidence that the economy will begin
expanding sometime in the second half of the year. Growth pickup will
likely prove transitory. While it is likely that headline GDP will
improve as inventory withdrawal subsides and fiscal policy stimulus kicks
in, our view is that whatever growth pickup we will see will prove
to be as transitory as it was in 2002, when under similar conditions
the market ultimately succumbed to a very disappointing limping post-recession
recovery. So yes, there may well be some improvement in the GDP data,
but it is based largely on transitory factors. We strongly believe it
is premature to totally rule out the end of the vicious cycle of real
estate deflation, residential and now commercial, that we have been
experiencing since 2007. Balance sheet compression in the household
sector will continue to pressure the personal savings rate higher at
the expense of discretionary consumer spending. This is a secular
development, meaning that we expect it will last several more years.”

◄$$$ PGBC PENSION GUARANTOR SOON TO BE OVERLOADED & INADEQUATE
$$$. Pension funds have widely been decimated. Their investments
in stocks, bonds, and commercial property have uniformly taken staggering
unprecedented losses, as in never seen before. Unlike investment funds,
they must continue to make payments to beneficiaries, the multitude of
retirees in the programs. So pension fund managers must continue to sell
into weakness, as they say. This is true for corporate funds and state
managed funds. Maybe they will change the options and deny early retirement
benefits, or delay them. Some pension funds might simply be seized, like
from acquired firms. My Digital Equipment Corp pension (admittedly small)
was assumed by Compaq, then again by Hewlett Packard, with no law preventing
HP from simply seizing the funds before the Jackass comes of age. As
big corporations fall into ruin, much focused attention has come to the
Pension Benefit Guarantee Corp. It is the USGovt sponsored
insurance outfit that as guarantor will assure minimal benefits to retirees
in failed firms. Features of the PBGC were mentioned in last month’s
report. The desperate steps taken by General Motors and Chrysler to stave
off bankruptcy must strike fear in the hearts of PBGC officials. The
assumption of their gigantic pension obligations would clearly render
the pension guarantor dead in the water. This is a very real proposition,
since GM just announced they are losing $113 million per day, equal to
$1.3 billion in negative cash flow in 1Q2009. The GM Chief Financial
Officer called it a revenue implosion. My view of the USGovt plan
to restructure GM is that it grants the car giant another three months
time, maybe six months, before total failure, along with most of the
entire Detroit carmaker supply chain. One analyst made a funny suggestion,
of clear perverse merit, that the USGovt would
do better in offering every GM and UAW car worker $110k in cash to go
out and start a new business in whatever makes sense, then plow under
the carmakers altogether.

A mysterious one month hiatus has taken place in announced PBGC publicly
stated guarantees of illiquid pensions. During the month of March, four
large pensions were seized, but since April, no word whatsoever from
the PBGC officials, and with little explanation. Perhaps they are
drained dry? One should know that some scummy firms are involved with
the PBGC fund and its management. The Pension Benefit Guarantee Corporation
has put to work some of the sharpest minds for contract management from BlackRock,
Goldman Sachs, and JPMorgan. Expect some fraud, because that is their
protected specialty. The financial status of the PBGC itself is weak.
Their September status report revealed that the single employer program
exposure included $57.32 billion for the 3850 plans that have terminated
and $12.61 billion for the 27 probable terminations. This number was
calculated prior to the end of September 2008. This accounting does not
included items like the pension collapse of East
River, forced by the Madoff scheme failure.
Then comes the anticipated pension assumptions of Propex with its 3300 pensioners and of Intermet with
its 4500 pensioners. All three were taken over in March 1009.

The PBGC fiscal yearend deficit was $11.5 billion, made worse by the current
$69 billion in known liabilities. They recently reported a 6.5% decline
in returns on professionally managed assets. The trend in pension takeovers
is not favorable. Over almost the last two decades, the Small Plan Average
Recovery Ratio (SPARR) has dropped from 12.01% in 1991 to 4.26% in 2008.
The SPARR is the percentage of assets recovered by the PBGC from plans
taken over in the year, compared to the outstanding liability assumed. A
falling SPARR is bad enough, but a negative asset return on managed funds
compounds the financial status of the pension guarantor fund altogether. Over
the horizon is the failure of GM and Chrysler, along with a maze of automotive
supply chain networks, along with a few other large surprise failures.
These inevitable events will force the USGovt to provide another few hundred billion$ into the fund.
Without new federal fund infusions, the guarantor fund is dead. Chalk this
story up as one of many grandiose promises likely to be broken, just like
extended promises for Social Security, Medicare, and even repayment of
the USGovt debt, also known as the USTreasury securities.
See the Inverted Alchemy article (CLICK HERE).

◄$$$ UNDER-FUNDED CALPERS EXPOSED FOR LARGESSE $$$. The California Foundation for Fiscal Responsibility has
reported a shocking fact, that 4820 CalPERS retirees
receive annual pensions in excess of $100k. The excesses of California
Public Employee Retirement System, its state worker retirement fund,
have been exposed. This is worse than the General Motors retiree pay
plans, which topped out at $92k for older workers. As of May 2008, the
4820 CalPERS retirees collecting over $100k annually did not include
government retirees in 80 other plans across the state, which covered
judges, University of California
faculty, the California State Teacher Retirement System, charter cities,
and 1937 Act counties. About half of these blessed retirees were public
safety workers, former police, firefighters, sanitation staff, and prison
guards. The remaining half includes former city managers, assistant managers,
county executives, district attorneys, engineers, finance officers, personnel
directors, computer scientists, and physicists. In the last twelve months,
an additional 120 new retirees have joined this exalted ‘$100k Club’ each
month. One feature of retirement packages lifts members into the exalted
club, the built-in annual cost of living increases.

◄$$$ BUFFETT’S BERKSHIRE HATHAWAY NEEDS FINANCIAL TRIAGE $$$. Berkshire Hathaway has
reported a whopping $1.5 billion loss for 1Q2009. In the next year, the
possible failure of Berkshire Hathaway (BH) will be more obvious. The company
led by Warren Buffett reported a significant loss as it wrote down its
ConocoPhillips investment, made at a time when oil & gas prices were
near their peak. A year ago they posted nearly a $900 million profit. BH
registered a loss of $990 per share in Q1 here, down from the $607
net income per Class A share reported in 1Q2008
a year ago. This was their first quarterly loss since 2001, when the company
suffered large insurance losses as a result of the September 11 attacks
on the World Trade Center.
Their insurance businesses generated an underwriting profit of $219 million
and investment income of more than $1 billion in 1Q2009, both up from a
year ago. They sold 13.7 million of the 79.9 million shares of ConocoPhillips
during the first quarter. A deeper look into BH reveals elements of
the USEconomy, led by the steroid-driven finance sector that
was derailed. The BH finance subsidiaries have been crushed. Berkshire also has major investments in such companies as Coca-Cola
and Wells Fargo. That bank is dead in the water, having offered colossal
deceptions about its financial condition. It has rolled forward hidden
losses in clear fraudulent manner, and lied in the Stress Test badly. See
the Yahoo article (CLICK HERE).

Berkshire Hathaway officials prefer to stress operating earnings, which
exclude derivatives and investment gains or losses. Berkshire
reported $1.71 billion in operating earnings in 1Q2009, which was down
nearly 12% from $1.93 billion in operating earnings a year earlier. Yes
fine, but derivative losses can kill an entire company very quickly, from
a sinking effect in quicksand, actually a rapid sudden plunge. See AIG,
for instance. Besides, the asset values on many items on their balance
sheet have been somewhat ruined, not a point of transparency. Their investment
in Goldman Sachs last autumn had a hidden motive in my view, to enable
shady protection from credit derivative implosions. It is unclear how much
privileged treatment BH will receive from the Wall Street club (aka syndicate).
Recall that Buffett earned some powerful ‘brownie points’ six years ago
when he offered his entire 129 million silver ounces to Barclays so they
could create their Exchange Traded Fund (SLV) and back it with physical
silver. The other hidden story in that silver deal is that Buffett bought
his way out of criminal fraud charges from association with his friend
from AIG, Hank Greenberg. A big lie was told that Buffett admitted to selling
silver too early at a paltry $7 per ounce. The truth is that he was called
away from his silver futures option positions that covered his entire silver
hoard, for hefty income under Greenberg’s advice. The truth to the BH shareholders
would have been painful, and would have revealed that gold & silver
do indeed pay a hefty dividend, from covered calls on options (just like
stocks).

◄$$$ TOTAL BAILOUT COSTS ARE STAGGERING AND CONTINUE $$$. The New
York Times does a great job in tallying up the total USGovt bailout
tab. The $700 billion bank bailout slush fund known as Troubled Asset
Relief Program (TARP) has received most attention. The USGovt has
created a diverse cornucopia of other programs to provide support to
the struggling financial system and large industries like the car companies.
Through April 30th, the subverted federal behemoth has made commitments
of about $12.2 trillion and spent $2.5 trillion toward them to date.
On the income side, it has also has collected more than $10 billion
in dividends and fees, a tiny drop in the bucket. Check out an overview,
organized by the role the USGovt has assumed in each case. See the New York Times article
(CLICK HERE).

◄$$$ CIA BLACK BAG BUDGET WELL FUNDED $$$. The USMilitary has
a vast budget for secret covert projects and operations. If you think they
are all for protecting the nation and its people, you are naïve. Installing
a police state is high on the agenda. The Pentagon’s so-called ‘Black Budget’ will
swell to over $50 billion for classified programs this year, to reimburse
foreign cooperation, to keep spies on salary, to maintain surveillance,
to pay off politicians, and a keep its secrecy. The budget is the largest
ever, a 3% increase over last year. In fact, the covert budget for secret
operations and related intelligence alone is equal in magnitude to the
entire defense budgets each for the United
Kingdom, France,
and Japan. Among the total USDept Defense
total spending, 7.5% has become classified. According to Bill Sweetman,
the crusty black budget seer from Aviation Week, sophisticated
weapons development remains the single dominating line item at $16 billion.
In inflation adjusted terms, it stands as 240% more than ten years ago,
when the arch-enemy Soviet Union fell. Listed highly
secretive projects include ‘Special Program’ and ‘Cyber Security Initiative’ and ‘Intelligence
Support to Information Operations’ accounts. Their weaponized virus (like Swine Flu) programs would fall under
the special program category, as does ‘Directed Energy Technology’ known
as ray gun research. One subscriber from Boston, who
used to work with Lincoln Labs outside Boston,
assured me that one special program was devoted to ‘Anti-Gravity Propulsion’ systems.
See some details from the Danger Room (CLICK HERE).

GREEN SHOOT NONSENSE OPTIMISM

◄$$$GREEN SHOOT ARGUMENTS ARE UTTER WISHFUL THINKING $$$. Actually,
they are organized propaganda from both the USGovt and
Wall Street, which has successfully conducted a financial coup of the USDept Treasury.
That coup dates back to Robert Rubin in the Clinton Admin, when in my opinion
the deep financial crime syndicate took root and installed vast trillion$
fraud schemes. Spring has brought nonsensical distractions, widely embraced,
about ‘Green Shoots’ showing up everywhere. Lessening of horrendous
news is not necessarily meaningfully promising. Bloomberg recently carried
118 articles and research reports on a single day last week from diverse
sources, extolling the promising signals, using ample horticultural metaphors.
They came from the Federal Reserve’s Open Market Committee, isolated USFed governors,
European Central Bank council members, Goldman Sachs economists, the Marks & Spencer
CEO (UK retailer), and others. These people have a vested interest in
exiting the gloomy landscape. For some, the ongoing crisis is a product
of their own design. The premise for the majority of such claims of recovery
is that conditions are no longer worsening. They are mostly ludicrous and
baseless, yet often unchallenged.

So a truck run off the road down a deep ravine, now descending at 60 miles
per hour (or 100 kph) has stabilized after it
was once careening down the ravine at 80 mph (130 kph)? Not, since no better off! That is like the next man
gunned down by only 8 bullets instead of 10 bullets for the last guy, or
a man on the sidewalk bleeding to death with only a liter of lost blood
per hour instead or 1.5 liters. Utter nonsense, especially when dependent
upon arguments tied to second derivative rates of change. The housing market
prices are falling by only 18.6% in February instead of 19.0% in January.
That is still a disaster, and plenty fuel for sustaining the tragedy of
home foreclosures behind horrendous crippling bank losses. Can households
now borrow home equity again, since the price decline has lessened a teeny
bit? Utter nonsense! Throughout this report, evidence will be presented
that refutes the green shoot nonsense from numerous angles and broad sources.
The US financial and economic systems are based largely
upon confidence and faith, which has been nearly destroyed. The US news
masters are spinning tales to prevent a crush of confidence. Listen to
a Contrary Investors Café joint interview with Rob Kirby and the Jackass
on this subject (CLICK HERE).

The financial mavens determined to emphasize (or fabricate) positive news
seem to produce almost no evidence to support their viewpoint. A better
flow of home refinances is mixed news, since under-water mortgages are
NOT being refinanced much at all. A rise in housing construction starts
a couple months ago was a fraud glitch, where the seasonal adjustment increased
starts by 10-fold, a total farce not challenged. Some moronic notions have
been put forth, like job loss always lags the economic rebound, and worse,
that the nation deserves a break from the crisis, and besides, the bankers
and USGovt have responded with volume. The
prevalence of the widespread belief that conditions can return to how they
were is not only troublesome but DELUSIONAL. The system broke last
autumn, irreparably. What remains is fraud during high volume supposed rescues. The fraudulent financial syndicates rely upon tremendous
money flow for their fraud, all covered by the lack of official disclosure.
My response is to focus on continuing jobless claims, the broad jobless
rate, the trend in job cuts, the home foreclosures, the heavy housing inventory,
and the falling home prices. These housing & mortgage factors are
the sources of the bank crisis, and they remain strongly in place.

The extreme bankers and Congressional response has served the Wall Street
elite needs 100x more than the Main
Street needs. Trickle down from bank and federal largesse NEVER results
in aid to the masses, no exception. The need is for Trickle Up, with new
job creation, new businesses established, and
capital formation, none of which is occurring. Businesses are still cutting
back heavily, and cutting their workforces. NO IMPROTANT PROGRESS HAS BEEN
MADE IN JOB CREATION, NEW BUSINESSES, OR CAPITAL FORMATION. Keep with the
metaphors. Green Shoots will soon be nipped in the bud, and in no way are
we out of the woods. Reality contains more storms, complete with high winds
from heavy reliance on monetary inflation in the face of fallen asset prices.
Besides, the fertilizer was contaminated with the acid used routinely in
recent years. The fields are still toxic.

◄$$$ SAME BAD MEDICINE IS USED THAT CAUSED THE CRISIS $$$. A coordinated
new policy by major central banks has been put into action, not for monetary
policy but for propaganda. They have applied the medicine, so await the
recovery as the minor hints of spring can be detected. The trouble is that
more easy money does not solve a crisis brought about by easy money. New
debts fix nothing on problems of bloated debt. Ample bank asset redemptions
have not kept pace with continued bank losses. Besides, most banks have
either been reluctant to lend or been ordered by the USFed not to lend. Dead banks don’t lend, an indisputable
adage learned the hard way in Japan.
The so-called innovative policies pursued by the US Federal Reserve do
painfully little to expedite the recovery process, and for good reason.
It is generally bad medicine, the only medicine they know, reliant upon
the same devices that caused the credit collapse, only the magnitude is
orders of magnitude bigger and administered quickly. Fast delivery of
bad medicine means unintended consequences will arrive quickly too. At
best the USEconomy receives a positive jolt for a few months because
keeling over again. Director Jack Daniels cannot administer more whisky
to treat the alcoholism, broken homes, job losses, and psychological damage.
The major central banks have cut interest rates down to near zero, printed
a mountain of money, and supposedly pumped up demand. Except that no pent-up
demand exists, and the great majority of pumped money has been directed
to the Wall Street fraud centers. The central bankers rely on computer
models to forecast a recovery, the same models which failed to anticipate
any economic or banking problems.

Many optimists believe the stock market is a reliable forecaster of economic
recovery. Despite sizeable market rallies, a perverse twist abounds within
these rallies. Phony accounting for banks, deep Plunge Protection Team
interference, games to remove short stock traders, and the blasted propaganda
have conspired to produce the rallies, even as almost all economic data
continues to be wretched, and factors behind additional bank losses continue
to stack up. A 20% or 30% stock recovery in this climate does not qualify
as a new bull market, not after a 50% decline from the peak in October
2007. Lawrence Summers, the current White House Economic Counsel head,
claims an economic recovery will come due to the extreme support given
to the financial sector, which will assuredly make a fortuitous transition
to the real economy. However, one should bear in mind that the USGovt, USDept Treasury, and USFed have constructed the biggest USTreasury Bond
bubble and the biggest USFed balance sheet bubble
in modern history. These serve as massive distortions to the equilibrium
of the bond market, the banks, and the USEconomy,
the biggest ever witnessed. No precedent in modern history EVER has shown
an example where such conditions result in meaningful stability or produce
legitimate growth. Expect instead massive additional blemishes to appear.
Expect extreme problems of the same variety in a matter of a few quarters,
maybe sooner. The USEconomy has had no meaningful
stability or legitimate growth dating back to year 2001. In fact, the
entire 1990 ‘Decade of Stolen Prosperity’ was engineered by kidnapping
the USTreasury gold supply to finance aUSTBond rally,
reduce the borrowing costs to corporations, and thus produce the illusion
of stable growth for a decade. Ever since 2001, the United
States has reacted in desperation to produce growth.
The last growth spurt was atop the housing bubble and mortgage finance
mountain, which predictably failed. See Hat Trick Letter reports in 2005
and 2006.

◄$$$ SHEDLOCK DISMISSES ‘GREEN SHOOTS’ WITH ELOQUENCE $$$. He covers
the key factors, which involve easy money, bubbles, productive capital,
ruinous business models, stimulus, and delusions. About Keynesian Nonsense,
he wrote, “In contrast to what Keynesian clowns believe, there is no
recovery, only another artificial boom, and a mini-boom at that.
Printing money can ‘stimulate’ (using the word incorrectly), only as long
as the spending continues. Easy money and unwarranted stimulus created
the global housing bubble. Now Keynesian clowns think it will do something
productive. It cannot, therefore it will not. In regards with China,
there is massive overcapacity already. US consumers are still retrenching.
Adding to China’s
productive capacity is exactly the wrong thing to do at this stage. The
export model is dead. The Shopping Center Economic Model is history
as well. Thus ‘stimulus’ (here and in China)
is guaranteed to fail, leaving still more overcapacity when it does. Green
shoots are a Keynesian mirage.”

◄$$$ TURN KUNSTLER EXPECTS DIVERSE ECONOMIC WEEDS $$$. James Kunstler pitches
in again, with water in the face. The calls for ‘Green Shoots’ in his opinion
overlook the decay coming to America in
stark ugly terms. The news has gone from wretched to just very bad, which
in no way is cause for a promising turn around the corner. Instead, major
important trends are in progress that will transform the nation, not for
the better. After dismissing the claims of recovery, Kunstler comments
on the structural misfit in the nation against a backdrop of failures,
and identifies a key new crisis in commercial property. He points out four
key trend changes. 1) The revolving credit economy with easy financing
is over. 2) The love affair with the car and cheap gasoline is over. 3)
The suburban living arrangement with accessible commutes and pristine settings
is over. 4) The food production crisis grows even as the American diet
has left the nation in horrendous health. He wrote, “The immediate problem
is that we cannot build anymore of it. The next problem will be the failure
of the stuff that already exists. The first stage of that is now palpable
in the mortgage foreclosure fiasco and, just beginning now, the tanking
of malls, strip centers, office parks, and other commercial property investments.
The latter will accelerate and become visible very quickly as retail tenants
bug out and weeds start growing where the Chryslers and Pontiacs once parked.
The next stage, which involves large demographic shifts in how we inhabit
the landscape, has not quite gotten underway.” Take this last point
as either a likely shift to cities or toward reclusive hideouts, like growth
of both the homeless and their tent cities. See the article (CLICK HERE).

BEHIND THE BANK STRESS TEST SHAM

◄$$$ BANK OF AMERICA & CRIMINALS TURNING ON
EACH OTHER $$$. The trend continues for bankers turning on each
other, trying feebly to defend themselves under fire, showing disloyalty,
breaking from the ranks, in an exercise of survival and saving face.
Their stories do not mesh at all. Bank of America CEO Ken Lewis revealed
to the New York State Attorney General Cuomo that both former Treasury Secy Paulson
and USFed Chairman Bernanke pressured him into
NOT revealing the poor status of Merrill Lynch to the Bank of America
shareholders. The merger was in progress, and BOA shareholders were denied
current accurate information, in an example of pure collusion and blatant
SEC violations. BOA needed the capital behind Merrill Lynch in order
to stave off financial pressures during the September calamitous events.
Lewis claimed pressure on him to remain secretive and confident. However,
Paulson revealed that only Bernanke had given Lewis the pressure. When
questioned before the USCongress, Bernanke
admitted to giving no pressure at all, and claimed Lewis acted entirely
on his own. The best approach would be to indict all three. The over-arching
lesson here is that the bankers are no longer holding to consistent stories.
They are turning on each other. They are individually divulging dirty
details. Divide them up, and question them under sworn testimony.

◄$$$ MAJOR JOURNALS SLAM THE STRESS TESTS $$$. Alan Abelson of Barronsdelivered
a harsh critique against the absurd whitewash of the major bank Stress
Test. He implies the results are pre-cooked, questions the rigor of the
worst-case assumptions, points out the dangerous approved high leverage
for current Tier-1 capital, and indicates that bank loss climax is several
quarters away. Quite the slam!! Pardon the quotes within the quotes, which
are entered with underscores and single quotes.

“As Philippa Dunne and Doug Henwood,
proprietors of the Liscio Report, shrewdly observe, the highly publicized exercise
made it look as if Washington’s
aim was ‘to restore confidence in the financial system
before restoring the financial system.’ And the Stress Test itself
struck them as being ‘precooked, with just enough talk of raising
fresh capital to be credible, but not so much as to induce fear.’ … But
to call [their economic assumptions] a worst-case possibility for the
economy is a good deal less than a creditable postulate. Rather, it bespeaks
a surprising failure of imagination on the part of the same folks who
have been able to spot plantlets of recovery in even the most unforgiving
data. Should worse come to worse, those fearless (or feckless?) forecasters
allow that the major banks could take a $599 billion hit…

Just by way of example, Barry Ritholtz, chief of the eponymous Ritholtz Capital,
seems more than a tad aghast at the idea that Geithner and
Bernanke, after duly weighing the results of their not-exactly-stressful
tests, have concluded that banks will be fine in the future with 25-to-l
leverage (Tier-1 capital equal to 4% of risk-weighted assets). And
while 25-to-l leverage may have been appropriate for depository banks
in the relatively sedate days before the Glass-Steagall Act
was dismantled, it seems more than a little much to Barry in ‘today’s
toxic-asset-laden banks.’ As to the cause of the seemingly generous
standard, he suggests it may have something to do with the Treasury’s
new role as ‘shareholder & cheerleader for bank profitability.’ That
explains at least why Tim and Ben never leave home without their pom-poms… Behind
this sharp increase in stress is the startling number of the nation’s
banks (1575) that wound up in the red in the first quarter. In a
follow-up report, Chris Whalen [of Institutional Risk Analytics] comments
that it is ‘pretty clear that the condition of the US banking
industry is continuing to deteriorate, and we are still several quarters
away from the peak in realized losses for most banks. We are not even
on the right block to make the turn.’ And, not surprisingly, he feels
strongly that this is not the time for investors to go Ga-Ga over
financials. In case you are wondering, there is no evidence that [Bernanke]
is color-blind and just cannot see all those green shoots littering the
financial landscape.”

The Wall Street Journal reports that Citigroup may need an additional
$10 billion to meet the government’s capitalization requirements. Citigroup
may need to generate up to $10 billion in new capital to meet the stresses
of imminent losses, according to information posted on its website recently.
This might be a more accurate assessment than the conclusion from the Soft
Stress Test itself, which assesses Citi to need
half that amount. The conclusions came out last week finally, at long last,
amidst great anticipation. Ten of the nation’s largest financial firms
need to raise $75 billion more to withstand the losses that would come
with a deeper recession and continued housing decline. Almost
half of that total is needed for new capital by the crippled Bank of America (which
is dead kaput bankrupt). The same USGovt report
claimed that the banking system was viable but still vulnerable. Of the
nineteen banks tested, nine were found sufficiently stable that they need
no additional capital. Among the 10 banks that need to raise more capital,
Bank of America needs $33.9 billion, Wells Fargo needs $13.7 billion, GMAC
needs $11.5 billion, Citigroup needs $5.5 billion, and Morgan Stanley needs
$1.8 billion. The process calls for the banks to develop a plan and have
it approved by their regulators before June 8th. They are entrusted to
raise the capital on their own. If unable, the USGovt is
prepared to provide from its bailout fund. Strategies have quickly been
announced. Wells Fargo Morgan Stanley announced they were selling stock,
and Citigroup said it would convert preferred shares (a form of debt) into
common stock. One should keep in mind that banks only slightly reduced
dividends in the first 15 months of this credit crisis, paying investors
nearly $400 billion in 2007 and 2008. While many banks have been reducing
their dividends more recently, bank bailout money still to some extent
goes right back out the back door. Well, don’t forget executives bonuses and lavish parties.

The five other financial firms found to need more capital are all regional
banks. They are Regions Financial of Birmingham, Alabama, SunTrust Banks
of Atlanta Georgia,
KeyCorp of Cleveland Ohio, Fifth Third Bancorp of Cincinnati Ohio, and
PNC Financial Services Group of Pittsburgh Pennsylvania.
Some large banks passed the Stress Test, and were told they needed no more
capital. They included the colossus JPMorgan Chase, the new and improved
bank holding company Goldman Sachs, the insurance firm MetLife, and credit
card companies Capital One Financial and American Express. Goldman and
JPMorgan will steal all the funds they require from the USGovt coffers,
with total impunity. There are 8500 banks in the United States. The top 19 banks control 45% of
all the deposits in the country. This very small minority of flagship firms
is suffering from insolvency, as a result of their own profound fraud,
lunatic leverage, and collusion with debt rating agencies. They were stuck
with inventory during the processing stages, when the flows all halted.
The regional banks that operate across the land did not create toxic loan
instruments that infected the worldwide economic system. The vast majority
of these 8500 banks in the country are in reasonably strong condition.

Oh, by the way, Wall Street firms are set to earn over $500 million in
fees in the wake of the Stress Tests conducted by Goldman Sachs. They control
the USDept Treasury. Several Wall Street firms
will act as underwriters when significant capital is raised to overcome
bank capital shortfalls, and to pay back TARP fund aid. The mini-flood
in underwriting fees will lift investment bank profits when they have suffered
from a protracted slump. The once lucrative market in bond securitization
and mergers plumbed to a record low in the first quarter of 2009, most
deservedly and justifiably.

◄$$$ NOT MUCH STRESS IN THESE STRESS TESTS $$$. The USGovt approved
$700 billion to bail out banks in TARP funds last autumn, while it embarked
on historically unprecedented takeovers of mortgage finance giants Fannie
Mae & Freddie Mac and the insurer American International Group. The
motive behind the Stress Tests is to reinstate confidence in a banking
system after the calamity that occurred several months ago. In my opinion
the US financial structure died
at that time, never to be revived. The continued housing declines and mortgage
defaults guarantee their path to ruin. Lending has halted, much more than
attempts to borrow have been submitted. The tests measured bank reserves
based upon common equity, the combined value of a common stock and profits.
Some of the banks have big enough reserves by traditional measures, but
fall short by narrower standards. In that respect, the Stress Test is effective,
since it eliminates the tendency to exaggerate their assets. Wall Street
owns the majority of worthless bond assets, not the regional banks. That
is justice, since Wall Street invented them and pitched their sale. In
the tests, the USFed put banks through a likely
scenario that imagines the recession would worsen. It included the
economic growth (GDP) to fall to minus 3.3%, but it already back to back
worse than 6% in the last two quarters! This built-in assumption is pathetic
and hardly stressful! The Stress Test included factors like joblessness
to hit 10.3% next year and house prices to decline another 22% more. Many
analysts have questioned how rigorous the tests were. A continued housing
price decline is surely a major blow to factor in. When the broad U-6 jobless
rate is already near 17%, how stressful is this test? However, in defense,
they are really testing the stress of the jobless rate moving significantly
higher from the current situation, and this is indeed stressful.

Some adept economists expect the jobless rate to approach or exceed 10%
this year, and perhaps even to go higher next year. Economic losses are
expected, described as from car loans and business loans rather than asset writedowns.
The USGovt claims that they force the banks to keep their capital
reserves at appropriate levels, yet loan loss reserves are pitifully low.
This great inadequacy has been a topic in recent past reports. My biggest
complaint about the Stress Test is that the big banks did not permit their
balance sheet and accounting books to be public for examination. This is
understandable, and a basis of the sham. The USDept Treasury
permitted banker inputs, thus they permitted continued accounting fraud
during a formal test exercise. They trusted banker data as accurate. This
is lunatic. Furthermore, no systemic risk component was included in the
Stress Test, like a bank stock sector decline to reflect grossly inadequate
loan loss reserves and their replenishment from earnings, like continued
AIG credit derivative implosions that might grow out of control. We know
such events have already occurred. The Intl Monetary Fund expects an additional
$3000 billion in bank losses in the coming years. The Stress Tests are
totally inconsistent with such an adverse situation, and claim from Bernanke
that the US banks in general are adequately
capitalized. They are obviously not!

The Stress Tests concluded that a worse recession in the United
States would result in bank losses at the 19 biggest
firms during 2009 and 2010 totaling $600 billion. They broke down the
type of losses by category: $185.5 billion from mortgages, $82.4 billion
from credit card loans, and $53 billion from commercial real estate loans.
Try at least $500 billion for mortgages! These commercial mortgages and
portfolio loans are considered most vulnerable to default right now.
Attracting fresh capital will be a challenge for banks, as they continue
to hemorrhage money. To date their losses have outpaced their new capital
infusion. One tepid remark came from Kevin Logan, chief US economist
at Dresdner Kleinwort. He said, “Looking at the big picture, you can
say that things are not so bad for the financial
industry as a whole. The banking industry is not going to make a lot
of money going forward, and that it is a dilemma for keeping banks solvent
and getting them lending.” Simon Johnson is a former chief economist
with the Intl Monetary Fund and professor at the Massachusetts Institute
of Technology (MIT). He has been an outspoken critic lately on systemic
failure and consequences. He said, “It is not really stressful, so
how could it be a stress test? This makes it seem like we are not having
a financial crisis at all.”Johnson claims to know some bank executives
who have told him they already are losing more money on commercial
real estate loans than the tests estimated even under the harsher
economic scenario. Another criticism of the stress tests is that
they totally bypassed a key problem confronting banks. The troubled mortgage
assets on their books block normal lending, much like a constipation
event inflicted upon the balance sheet.

Dissent and doubt is out there. Some critics question whether the findings
are credible, since the USGovt officials seems so motivated to sustain public confidence
in the banks. They expected that the results would have to find the banks
basically healthy, in predetermined results. Thus a white wash, or pre-cooked
as one critic claimed. JaidevIyer is a former risk management chief at Citigroup. He objects
to the game of creating ‘Winners & Losers’ when the certain grand losers
are taxpayers, who wind up being on the hook. He said, “If there is
in fact no appetite to let losers fail, then the real losers are the market
at large, the government, and the taxpayers.” NourielRoubini provides
a $1.8 trillion estimate for additional US bank
losses. That is the upcoming stress for the system to absorb, triple the USGovt estimate. The entire US banking system currently has only $1.4 trillion
of capital. The US banking system is already insolvent, since
it is currently carrying more unstated losses. That is what Zombies do.
The USFed, USDept Treasury,
and FDIC are already guaranteeing or supplying 70% of the entire banking
system balance sheet. Expect much more support, like a few $trillion more!

By the way, hardly a passing comment, the Federal Deposit Insurance
Corp has recently requested that the USCongress prepare to resupply it with $500 billion in new
funds to handle bank failures, an appeal hardly even mentioned by
the financial networks (too distracted by Stress Tests passed and stupid
green shoot talk). A report comes that the FDIC is preparing some
sort of Superfund that could handle the failure of a large ‘systemically
important financial institution’ soon. My guess is some prominent
bank is badly exposed to Detroit
carmaker debt, in addition to its own fragile teetering position. See
the Pragmatic Capitalist article (CLICK HERE). While
the financial markets rejoice over rigged meaningless Stress Tests to
falsely present a clean bill of health, the reality is that the FDIC
is preparing for massive failures from stress for banks.

◄$$$ THREE BIG BANKS EXECUTE A DILUTION $$$. Despite passing the
Stress Test, three banks have announced plans to raise capital to help
repay government funds received last fall. US Bancorp, Capital One, and
BB&T Corp have all announced common stock offerings. The proceeds will
be used to repay preferred stock investments the USGovt made as part of the USDept Treasury’s
TARP Capital Purchase Plan. Banks in general that received
funds under this program have recently raised strong objections about USGovt interference with their operations, including the
slush payments on executive pay, dividend cuts, secondary stock offerings,
and capital raises. These three banks were among the nine banks
judged by the USGovt to have sufficient capital
to withstand a deeper recession. An observer could look upon this news
two ways. Sure, the banks exit from some federal scrutiny. They might be
weaker than the Stress Tests indicated. But the overriding point is that
they will each be more heavily diluted, with possible additional dilutions
later. My forecast for almost a year has been for a broad set of US
banks to be diluted into oblivion.

Minneapolis-based US Bancorp, which received a $6.6 billion investment
from TARP funds, plans to sell $2.5 billion of its common stock. It is
a Midwest regional bank. Virginia-based Capital One,
which received $3.55 billion from TARP funds, plans to sell $1.76 billion
in common stock. It is a credit card giant firm. North Carolina-based regional
bank BB&T, which received $3.1 billion from TARP funds, plans to sell
$1.5 billion in common stock, and cut its dividend by 68% to 15 cents.
It is a Southeast regional bank. The news of these
three secondary stock offerings was blamed on a broad stock market decline
on Monday May 11th. Expect many more such events to whack the banks, which
have been living on privileged ground for two months, permitted to engage
in sponsored accounting fraud. The irony is great. Banks deemed healthy
are diluting their common stock valuations. So how badly will the bigger
unhealthy banks dilute their stock, when they are forced to raise capital?
Bank of America is worth zero, yet it trades at over $13 per share, up
sharply from its exaggerated level at $3 per share two months ago. There
is money to be made trading BAC, but only if a steady supply of greater
fools is assured, and the reality of their empty balance sheet can remain
hidden.

◄$$$ CITIGROUP ACCOUNTING FRAUD IS REVEALED BY MARTIN WEISS $$$.
In a bizarre exercise intended to defend legitimacy, the bankers are engaged
in a complex game of propaganda. The big banks pressured the USCongress to
relieve Wall Street from the chains of FASB Rule #157, and the minion senators & representatives
from the fully compromised USCongress obeyed
their paying masters. Bribery, coercion, threats, and pressures go
a long way to produce legislation these days. The result has been a baseless
stock rally led by insolvent banks that have lied desperately about their
capital and earnings. The end result is the global financial markets
are losing faith in the US$-based
system, since the US is
regressing in backward steps rather than working toward remedy. Few inside
the United States seem
either aware or to care about foreign perceptions, yet creditors are dominated
nowadays by foreign institutions and central banks. In my view, attempts
at remedy would reveal a failed financial structure and banking system
that cannot be revived, broken irreparably since last autumn. Furthermore,
no new cast of CEOs for the big banks is likely, since new players would
recognize the colossal fraud and come forward. By continuing the game,
with the same cast of fraud kings, the banking system avoids revelation
of the historically unprecedented fraud, a gigantic crime still in progress
that involves several trillion$. The contradiction between the US bank fraud kings and the
Intl Monetary Fund projections of additional bank losses is another big
billboard message, again ignored. Maybe somebody should reveal to US bankers
and their investors what is happening in the mortgage market, with losses
to come on a much broader basis. Future bank losses will continue in a
torrent!!!

Citigroup announced a quarterly profit of $1.6 billion for 1Q2009 in mid-April,
which by law is fully audited. However, if accounting gimmickry is removed,
it was actually a deep $2.5 billion loss, a profound $4.1 billion difference.
The gimmicks pertained to three types of liberal accounting methods, better
known as accounting fraud. 1) Toxic assets were valued at fictitious models
determined without challenge by Citigroup itself. No scrutiny there, only
fiction to claim asset values where none often exist from models that are
not even revealed. An old rule is that if no price is available from a
market, then the asset is worthless. 2) Shell games were rampant on loss
reserves management. Citigroup liberally placed current losses in past
quarters, thus resulting in lower required loan loss reserves to be set
aside in the current quarter. This is a shell game. 3) Illicit debt markdowns
on the balance sheet, in bold faced accounting fraud that defies any other
description. If a debt has lost half its value, say from $4 million
to $2 million, some firms claim they can buy back their debt for less,
and thus book a $2 million gain!!! They book a gain on their quarterly
earnings report, calling it a credit value adjustment! This practice
is being done more and more often, incredibly, without a peep from the
Securities & Exchange Commission. So if they realize a string of such
losses, they can declare a string of quarterly profits??? Some details
on Citigroup’s deteriorating loan portfolio are revealing. Net credit card
losses rose from $1.67 billion to $1.94 billion from 4Q2008 to 1Q2009,
a 56% jump. Credit card delinquency rose in quarterly sequence from 2.62%
delinquency to 3.16%, as in 90 days past due. Combined consumer losses
rose from $3.442 billion to $3.786 billion in sequential quarters, a 66%
jump. So one can detect a significant worsening in their credit losses
generally. Thanks to Martin Weiss for the autopsy of Citigroup,
the biggest zombie strutting in the global financial field of dreams. Actually,
that shameful distinction is a close race with Bank of America.

◄$$$ DETAILS ON CONVERSION OF PREFERRED STOCK
$$$. Much talk has come about banks and their seemingly desperate
measures taken to render themselves solvent. The absurd changes, gigantic
steps backwards, in the Financial Accounting Standards Board (FASB) rules
once again permit financial firms to use creative methods in declaring
whatever valuation they wish on illiquid and nearly worthless assets.
The Stress Tests for banks coincide with banks taking urgent steps to
create more bank equity, even at the risk of severe dilution. They are
actually forced into taking the desperate steps. In focus is the preferred
stock of banks and financial firms. Such stock is not considered equity
to the bank balance sheet. It usually offers a dividend. Therefore,
preferred stock acts like a corporate bond, but trades like stock shares.
In my view, it is close to convertible bonds. When preferred stock or
debt is converted to stock equity, the assets of the company do not change,
but the total number of shares rises on a potentially big scale. So the
dilution is enormous. Worse, if the preferred stock takes a sizeable
haircut in a typical concession toward a writedown, the balance sheet assets drop but the shares outstanding
rise significantly. So the dilution from added shares and lower admitted
capital is more than enormous against a lower total balance sheet. Some
regard the process as sleight of hand to enable more bank equity and
to stave off bankrupty. It is instead a severe
step in dilution, taken in desperation. Companies would much prefer to
service a debt than have it reduced and put in highly liquid form, as
traded stock.

In October 2008 in Toronto Ontario at a conference,
my statement was loud and specific: EXPECT US BANKS TO BE DILUTED INTO
OBLIVION. At issue is the level of Tangible Common Equity (TCE) for a given
bank. By exchanging preferred for common shares, banks thus increase their
TCE, a measure of how much capital a firm has in its possession. That capital
enables it to make new loans, to conduct operations, and to withstand losses.
This TCE financial yardstick strips out intangible assets and discretionary
goodwill, and preferred stock. Goodwill is the premium above net assets
paid for acquisitions, often exorbitant and foolhardy. USGovt regulators want TCE to equal about 4% of assets as
a minimum, up from an earlier target of 3%, according to informed sources.
Seven of the banks under review have ratios of less than 4%, company reports
show. Phillip Jacoby is a managing director of Spectrum Asset Mgmt. He
said, “Banks are going to need more capital. [The USDept of]
Treasury does not care about dilution. All they care about is financial
mass and loss absorption ability to offset what could be more non-performing
loans and writedowns in the future.” So at
first the USGovt protected bondholders. Now they are forcing them and
the preferred look-alikes to take bitter medicine. Stockholders have been
no priority all through the process.

As the bizarre, and probably fallaciously devised
financial Stress Tests are revealed and produce impact, the number of shorted
financial stocks has risen once again. The number of Citigroup (C) shares
sold short has increased six-fold since February 27, when the USTreasury announced
the forced conversion of preferred shares into common stock. Short interest
in Bank of America (BAC), MetLife (MET), and American Express (AXP) each
has jumped over 40% in the same period. In total, short sales of the 19
publicly traded financial companies undergoing USGovt not-so-stressful
scrutiny were twice as high on April 15th versus July 2008, well ahead
of the Lehman Brothers collapse. One of two conclusions is clear, that
investors expect stock dilution and share price declines from the potential
of conversions from preferred to common shares, or they perceived heightened
risk of failure in these companies that undertake desperate measures. Some
traders are deploying a strategy of buying preferred shares and shorting
common shares, in an arbitrage that was highly successful in February going
into March lows. It will be interesting to witness any possible differentiation
among bank stocks after the Stress Tests are revealed. In my view, both
Bank of America (BAC) and Wells Fargo (WFC) are destined to decline in
share price. They are both in big trouble, all concealed.

The details on stock conversions are ugly in their magnitude, in order
to raise capital. Citigroup is in the process of converting up to $52 billion
of preferred shares, half of that held by the USGovt.
The Bank of America will exchange $25 billion to $45 billion of preferred
shares. Analysts at Creditsights in New
York City expect Wells Fargo and several regional banks to convert preferred
to common shares. In order to pull off the deals, some banks are enticing
preferred holders a premium to the current price. Citigroup apparently
has offered holders of the $2.04 billion 8.5% Series F preferred an amount
of $21.70 worth of common shares, which represents a 24% premium over their
price of $17.48 as of May 1st. This new wave of short selling has occurred
alongside the purely engineered phony bank stock rally that has lifted
the BKX bank stock index by over 40% since the end of February. See the
Bloomberg article (CLICK HERE).

CORRUPTED USTREASURY BUBBLE LEAKS

◄$$$ FAILED USTREASURY TRADES WENT OUT OF CONTROL $$$. The biggest
banks, these hollow institutions continue to engage in sales of USTreasurys with
rampant failures to deliver funds in order to maintain cash flow, not mentioned
in quarterly earnings reports. Interest rates near record lows and surging
demand for the safety of USTreasuries have pushed the
amount of failed such trades to a record $5.3 trillion in the week ended
October 22. See an article entitled “Wall Street Selling Imaginary
Treasuries” on Market Skeptics (CLICK HERE). This
is called naked shorting, counterfeit, and not even complicated fraud. Regulators
remain quiet on the subject, business as usual. The US financial sector is reminiscent
of a band of zombies that usurp the vitality of the system they reside
in, yet continue to control the leaders. For some detailed diagrams of
the money flow for legitimate shorting, naked shorting, and failure to
deliver securities, see a second Market Skeptics
presentation (CLICK HERE).

Rampant USTreasury Bond fraud has been going
on for many years. Outright counterfeit of USTBonds has been traced in the last two decades to certain
Wall Street firms, with full impunity. Naked shorting is more crafty and
devious, but no less counterfeit. The details of naked shorting of USTreasury Bonds are surprisingly broad based, extend
for many years, while authorities have made little effort to enforce the
law. This is supposedly the most liquid and transparent market in the world. USFed Chairman Bernanke recently has imposed a
3% fee on undelivered USTBonds, but regard that
as a minor cost of doing counterfeit business. The fee went into effect
May 1st. Perhaps Wall Street can order the USCongress to
create an oversight group to handle the bond failures to deliver, which
would end up putting a concrete lid over the cover-up. This is just one
more gigantic fraud on Wall Street permitted to perpetuate in shameful
public fashion. Some strange consequences are very real. Widespread shorting
of USTreasurys has been happening. Enforcement
would require buybacks when principal prices are rising. Some prominent
counter-parties would go bust. By not enforcing the fraud laws, the USGovt had
enabled interest rates, both short-term and long-term, to remain low for
a sure benefit to the USEconomy. The total volume of extended naked short USTreasury sales topped out at $2.5 trillion in October 2008,
and has recently come down substantially to under $300 billion. However,
not one prosecution of fraud has occurred by the intrepid regulator lapdogs.
The Bush Admin effectively turned off almost all regulatory body functions.

Here is the key point behind the substantial decline of USTreasury failures
since their recent peak last autumn. Major central banks recently printed
$2.5 trillion and just gave it to their broker dealer conspirators in order
to settle those fails to deliver, with full trust. This carries with it
a clear implication, that the expansion in the balance sheet for
the same central banks cannot be reversed, as their official heads
utter words in pure platitudes. No legal obstacles, in fact no discouraging
motivation exists, for broker dealers to be prevented from selling more
IOUs (aka USTreasury failure to deliver) if they
encounter another cash flow problem. The big banks can and will do it again.
One needs to think carefully about motive and condition. Broker dealers
from major investment houses, who do the government bond bidding, would
never have sold USTreasury IOUs if they had any
other viable source of funding available to them. This confirms that
the biggest banks are truly insolvent and have virtually ZERO cash on their
balance sheets. Here is their prima facie for bankruptcy.

◄$$$ NASTY REPO CONSEQUENCES OF UNWINDING FAILED
TRADES $$$. The USGovt now owes over $1 trillion in foreign denominated debt,
either directly through swap lines set up by the USFed last
October or indirectly via US financial institutions. The US cannot depend upon the
handy printing press to escape this debt. While the new policy of imposing
a 3% fine for late deliveries is designed to curb logjams caused when
traders fail to meet their obligations to deliver USTreasury Bonds,
some strategists expect strange effects. Different disruptions are
likely in the repurchase (Repo) market where dealers finance their holdings
to the tune of $7000 billion volume in trades per day. The USFed has
renewed challenges as it must soon purchase up to $1750 billion in USTreasuries and USAgency Mortgage
securities. Darrell Duffie is a Stanford University finance professor and member of the New York Fed’s Financial
Advisory Roundtable. He said, “Making short-selling potentially costly
can reduce market liquidity. Financial markets with relatively unencumbered
short-selling perform better.” Yes sure, but what about fraud and
counterfeit, which he implicitly condones? The challenges lie ahead,
as the USGovt must raise $3.25
trillion this fiscal year to finance bank bailouts, stimulate the USEconomy, and service a federal deficit, according to Goldman
Sachs. Trading in the USTreasury Repo market
is already down to $364 billion per day this year, compared with $656
billion in the same period of 2008. The number of USFed primary
dealers has been reduced to 17 in the last two years. The reduced
Repo market trading is testimony to the phony nature of the USTreasury bubble
and so-called ‘Flight to Safety’ phenomenon. It is a central bank
concoction to conceal a broken US and Western banking system. In my opinion,
the gradual corruption of the USTreasury market
adds credence to the argument that the US Federal Reserve someday in
the future might simply cease operations, and resign their contract.
The market they control has been slowly destroyed and discredited. See
a Bloomberg article (CLICK HERE).

Market Skeptics provides some excellent insight on the totally illegal
practice and its clear consequences. They wrote: “Following the collapse
of Lehman Brothers in September, fails to deliver among the 17 primary
dealers in the US treasury market have rocketed to more than $2 trillion
over a period of weeks and still lie above $1.3 trillion. Broker/dealers
have stopped delivering bonds. Holders of US Treasuries are now scared
to lend into the Repo market in case their bonds are not returned, and
potential buyers sit on the sidelines fearful of handing over their money
to a counter-party that at best might not deliver a bond on time, and at
worst might go under… If investors turn their back on Treasuries, the US government will find it
increasingly difficult and expensive to raise money and roll over its maturing
debts. Upward pressure on interest rates will occur at a time when the
government needs to be loosening monetary policy in order to jump-start
a domestic economy that is heading towards a depression. As a result of
fails to deliver, the most transparently priced instrument available now
has investors scratching their heads. The natural balance of supply
and demand has been altered and the true price of Treasuries has become
obscured…

Fails to deliver in the Treasury markets are not a new phenomenon.
There is data for fails for Treasuries, agencies and mortgage backed
securities as far back as 1990, says Susanne Trimbath,
an economist, and former employee of the Depository Trust Co, a subsidiary
of Depository Trust & Clearing Corp. Back then, though, there would
be $50 billion of fails in a whole year, she says. That figure has grown
enormously. Failures in US Treasuries were 8.6% of all Treasuries
outstanding in the first five months of this year, compared with 1.2%
in the first five months of 2007. That has ballooned further over
the past three months, hitting more than $2 trillion for almost the entire
month of October, more than 20% of the daily treasuries trading volume.”

◄$$$ NOLAND CALLS IT A USGOVT FINANCE BUBBLE $$$. Doug Noland of
the Prudent Bear makes a firm point that continued debt extensions and
vast usage of more debt securities, together with controlled explosions
of money ensurs future crises, pocked by outbreaks
of price inflation and greater bankruptcies, and certain credit derivative
fires. Noland claims the progression of current USGovt monetary and fiscal actions presents an entirely new
gigantic risk, even larger than before. When remedy is not pursued, but
rather greater amplitude is given to the same destructive mechanisms that
caused the current crisis, a GREATER CRISIS IS ASSURED AT A LATER DATE.
The horrible so-called solution underway guarantees a similar worse problem
in the near future, because it is hatched of the same formula ingredients
with amplified volume in desperation. Noland claims the recovery is a bubble
in itself, nowhere coming atop any legitimate foundation. See his article
entitled “The Greatest Cost” on Safe Haven (CLICK HERE).
Noland wrote:

“I see ample support for my view that bubble dynamics have taken root
throughout government finance. This unprecedented inflation includes
Federal Reserve credit, Treasury borrowings, [Mortgage] Agency debt, Govt Sponsored Enterprise mortgage backed securities guarantees,
FHA and FDIC insurance, massive pension and healthcare obligations, the
myriad new market support programs, etc. This Government finance bubble
is domestic as well as global. Amazingly, the scope of the unfolding
bubble dwarfs even the mortgage finance bubble. And, importantly,
it is reasonable to presume that the Federal Reserve will find itself
in the familiar position of being trapped by the risk of bursting a historic
Bubble.

So I see the probabilities as very low that the Fed will reverse
course and impose tightened liquidity conditions upon the marketplace. Actually,
reflationary pressures may force the Fed to increase its Treasury holdings
in an effort to maintain artificially low interest rates. At the same
time, I do not see higher inflation as the greatest cost associated
with this predicament. Much greater risk lies with the acute systemic
fragility that I believe is inherent to major bubbles. Similar to mortgage
finance 2002 to 2007, the marketplace is significantly mispricing the
cost, and failing to recognize the risks, of a massive inflation of
government finance. And while every bubble has its own dynamics and
nuances, the unfolding Government finance bubble has even more precarious Ponzi finance
dynamics than the mortgage bubble. [HE REFERS TO USTREASURYS AND
USFED BALANCE SHEET.]

The danger is that markets too easily and for too long accommodate massive
credit expansion during the boom. Federal Reserve policies are fundamental
to this dynamic. But at some point and out of the Fed’s control, as Wall
Street learned, greed inevitably turns to fear and a reversal of speculative
flows marks the onset of the bust. And it is the massive inflation of
non-productive credit that ensures the unavoidable crisis of confidence.
Can the underlying economic structure service the mounting debt load
or, instead, is it the massively inflating debt load that is sustaining
a vulnerable economy? And it is in this vein that I fear the Government
finance bubble is on track to destroy the creditworthiness of the entire
economy. And this Ponzi dynamic is the greatest
cost to what I fear is a continuation of unsound policymaking.”

◄$$$ DANGEROUS SIGNALS ON CDSWAP RENEGED PAYOUTS $$$. The biggest
bond insurer MBIA is set to renege on insurance payouts. Its CEO Jay Brown
claimed they might unwind much of its losses because the debt it agreed
to back failed to meet certain contractual promises.
He cited between 66% and 80% of the company’s losses on second mortgage
bonds and mortgage based Collateralized Debt Obligations are associated
with collateral deemed ‘ineligible’ in their assessment. Hence MBIA intends
to pursue avoidance of guarantee payouts. A dangerous trend might begin
if other bond insurers follow this path. One must wonder if this could
become the proverbial canary in the coal mine for firms to retract on payouts
for credit derivative contracts, in a potentially loud illegal manner.
This is not the first time such a defiant violation of contract has been
attempted. See the Bloomberg article (CLICK HERE).

Credit Default Swap insurance writers, prepare for shocks waves and major
damage. Games are being played to avoid bond defaults, when the carmaker
bonds are to soon be trashed. If General Motors and Chrysler bondholders
are to be denied their rights, the companies who guaranteed CDSwaps are
going to be disappointed also. Bondholders might be playing a risky game
of chicken because they have insurance in CDSwaps.
If so, you can consider the CDS underwriters one more negotiating party
that did not obtain a seat at the table dominated by Wall Street firms.
They are going to be left holding the bag, a reason to want some major
changes in how the CDS market is run. Some progress has been made by
the Intercontinental Exchange (ICE) on creating a Clearing House for accepting CDSwaps,
in a back loading process that has eliminated some counter-party risk. So
far, ICE has moved $362 billion worth of CDSwaps into
the Clearing House, where risk is absorbed by the market. Later, ICE plans
to move stock index contracts and single name corporate bond contracts
to the same Clearing House.

◄$$$ INTEGRITY OF CORPORATE BONDS AT RISK $$$. A
well-informed and savvy contact has given a warning on the corporate bond
market integrity. He has past experience in construction and finance, having
sat on company boards. He directs attention to the numerous USGovt actions
that use heavy handed methods in order to restructure corporate bonds of
certain important national corporations like General Motors and Chrysler. The USGovt has consistently been denying the senior bondholders
their due rights, as in first in line after financial failure and resolution.
The impact, often called unintended consequence, could easily result in
lost faith in corporate bond investments. They have been by Presidential
fiat been overridden, whereby their legal contract rights mean nothing.
President Obama has blamed bondholders (in hedge funds) who refused to
accept concessions on debt restructure. The investors involved have hit
back, accusing the USGovt of a risk in ‘overturning the rule of law’ by offering
a better deal to the United Auto Workers union. One observing bankruptcy
attorney said, “These hedge funds that did not agree, they have got a darn good case because they are secured. We
have got a Constitution in this country.” Foreigners are watching.

Craig McC said, “I believe we are in the
very early stages of the collapse of the US corporate bond market.
With the USGovt’s abrogation of the legal rights
of secured bondholders in favor of employee pension commitments and its
likely replay for GM, it is becoming very clear (at least to me) that the
rights of corporate bondholders are suddenly being eroded by government
fiat. In the near future I would not be surprised to see significant
offshore selling of US corporate bonds. I would also not be surprised
to see to failures in the offerings of new long-term corporate bonds
as institutions and individuals demand much shorter durations and higher
interest rates. This vicious cycle will be exacerbated by the US Treasury’s
gigantic financing needs. In the end I believe we will see the failure
of the US corporate
bond market. Also, the USGovt’s shift in
favoring workers over bondholders will likely spell significant trouble
in the municipal bond market.”

Nobody should minimize the threat to the corporate bond market integrity
and foundation. Bill Frezza makes excellent points
on the subject. He is a partner at Adams Capital Management, an early stage
venture capital firm. See his article on Real Clear Markets (CLICK HERE).
Notice the comment about lower bond yield in return for first place in
the liquidation process. That specifically is under attack in market dynamics
now! He asks rhetorical questions that corporate bond bidders will soon
ask. The US has already become a kleptocracy,
leaving next the question of what type next? Implications are a possible
fast ride from open fascism to veiled communism.Frezza wrote:

“According to US Bankruptcy Code, secured
creditors, that is lenders who have a contractual security interest
or claim to specific collateral, have to be paid before unsecured
creditors. Unsecured creditors claims are prioritized according
to explicit rules defined by law. With the exception of short-term
payments approved by a bankruptcy judge to keep a company running during
the reorganization process, each priority level has a right to be paid
in full before creditors with the next lowest priority get a dime. That
is why secured debt can be had at a lower interest rate than unsecured
debt. In fact, that is why troubled companies have any ability
at all to raise money. Credit flows because everyone knows the rules
of the game, even in bankruptcy. Well, at least they used to.

Why would anyone lend money to heavily unionized companies knowing
that if things went wrong, the president and his men could trash their
security interests by executive decree, hold them up to public vilification,
and subject them to future retribution by regulators? Why would anyone
buy the shares of TARP-backed banks or invest alongside them, knowing
that their executives have proven their willingness to sacrifice shareholders
interests and throw co-investors under the bus any time the president
snaps his fingers? Why would foreigners buy the distressed debt of American
companies knowing that this debt cannot be secured by law but only by
political clout? How is the Federal Government supposed to unwind its
ownership in the growing number of companies it has nationalized if prospective
buyers know that should things ever take a turn for the worse, Uncle
Sam will be back demanding extralegal ‘sacrifice’ in the name of “saving” jobs?
How is private credit supposed to ‘start flowing again’ if the United
States of America morphs into a caudillo-run kleptocracy whose
explicit policy is to ‘empower the workers’ by chasing ever higher poll
numbers by demonizing the very people whose job it is to provide credit?”

◄$$$ SUPPORT FOR THE VAST USTREASURY BOND MONOLITH $$$. In the same
theme of corporate bond erosion of trust, another key point should be made.
We are seeing multiple factors working to continue the USTreasury Bond
monolithic bubble, with new support pillars. Actually, erosion of one bond
pillar could become a new USTBond pillar. The
tremendous finance needs by the USGovt require
continued outsized monumental investment demand. The monolith itself will
require some extremely strong parasitic dynamics in order to continue growing,
as in new channel fund (blood) flows. One should expect to see profound
corporate bond damage and almost all kinds of bond damage uniformly, like
municipals (mentioned by Craig) and speculative junk. USGovt and USFed policy must work toward destruction of non-government
bond structures in order to feed the cancerous USTreasurys. Or
have USTBonds become a black hole? At the same
time, the psychological consequences of the USFed and USDept Treasury
working together to monetize USTBond purchases is another exercise in gross trust erosion,
made worse by failures to deliver. The grotesque isolation of the USFed as sole bidder via printing press wallet is assured.
The matter has become so distorted into the land of the bizarre that a
former Federal Reserve minion (some former regional president) actually
suggested that the USFed would like to offer
negative interest rates in order to stimulate the USEconomy and US bank system. If memory
serves me, it was Lyle Gramley. How outrageous!
What a clear loud indictment of the central bank franchise system, and
its complete failure.

As a further example, large hedge funds have lately been targeted by the USGovt and
Dept Treasury as villains. They have been blamed for investment bubbles,
blamed for interference with restructure plans, blamed for stock market
declines from short sale strategies. Yet, some prominent hedge funds rode
to the rescue of Chrysler and General Motors in the last year when they
purchased senior corporate debt. These same hedge funds are now being denied
their legal contract rights, priority in the restructuring process. They
are being screwed. The secured bondholders are being coerced in the USGovt plan
to take a 5% stock ownership in exchange for their corporate bonds with
heavy bond loss. Large commercial lenders are being permitted to take a
20% stock ownership. The lenders are not secured, and should have a lower
standing in the bankruptcy restructure process. Here is the key. The
plan is designed by Wall Street firms, which are the large commercial lenders. They
again favor themselves in pure syndicate fashion, after hijacking the USGovt financial team.

◄$$$ MY PERSONAL USTREASURY BOND FORECAST $$$. Here
is my best forecast on USTBonds and USDollar,
in response to the upcoming tumultuous months later this year. The big
event to change things is failure of some big US banks. In my opinion, Citigroup and Bank of
America head that list of potential failures. Things go unplugged
this autumn on Wall Street. This time the damage will be worse than last
year. The outcome to the USTreasury Bond,
the USDollar, and gold could be volatile. My
serious conclusion is that the opposite effect will be seen in the USDollar and
gold price movement in reaction, compared to autumn 2008. The USTBond market will love the failures, as perhaps of half
of Wall Street fails or stares at the abyss of failure. They are dead
now, but masquerading as living to enable executive sales and bailout
money infusions. The rise in the USTBond will
give lift also to the USDollar, but only temporarily. Gold will likely NOT suffer
much damage this time, in contrast to last autumn. The USTBond and USDollar cannot be
both levitated in corrupt fashion. In a matter of a month or two after
the tumultuous sequence of events, the USDollar will
come down hard, as the US will
be recognized as teetering on failure systemically and nationally. Enter
the Third World!

The USTBond will remain elevated for some time, as stock funds
migrate into bonds. Gold will enjoy a parallel ride up with USTreasury Bonds
during the tumult. Confidence in USGovt stewardship
will be at rock bottom, but the printing press will be running day & night. The
safe haven status of USTBonds will be shared
by gold, until competitive global currencies are launched, along with
broader issuance of Chinese Govt debt securities. The
deep and sudden USEconomic decline will fortify
the movement into USTBonds, as corporate profitability
will plummet and vanish. Then many months down the road, at some uncertain
date, the USTBonds finally default despite
a near zero yield and high principal value. The primary ultimate factor
upholding the USTBond will be monetization,
the heavy deployment of the printing press. It is not be so
hidden. Foreigners will just say no, no thanks, no more, no mas, since they will have alternatives by then. Huge fallout
will come when Detroit fails
and when a couple Wall Street banks fail. The combination of Detroit bankruptcy and another Wall Street round
of failures plus the highly likely failures of Citigroup and Bank of
America will compound the effects. Add in more AIG and Fannie deep losses,
and you have the prescription for unprecedented events that will not
follow past patterns. USTreasury Bonds will
initially be seen as the only port of safety in the storm, but they will
inevitably not survive what comes.

◄$$$ USTREASURY BONDS BEGIN TO BREAK OR GIVE OFF GAS $$$. The 10-year USTNote yield
(TNX) has gone to 3.4% in the last two weeks, a quick move out of the range
established since January. It next will revisit the former resistance at
the 3.05% level. A better perspective is that the entire positive lift
to long-term USTreasurys from the announced $300
billion monetization scheme by the US Federal
Reserve has been wiped out and eliminated. Instead of a strong bid
perceived, the credit market detects either solvency risk from lack of
foreign participation, or price inflation risk from the monetary pumps
spreading excessive amounts of easy money into the US banking system, eventually to find its way
into the broad USEconomy. Another realistic argument
is that the stock market is being fed from the bond market, as the falsely
proclaimed ‘All Safe’ signals have been trumpeted for two months. Funds
from bonds have gone into stocks for two months. The weakness in the last
few days in stocks has been to the benefit of USTBonds.
Stocks and bonds have their own ebb & flow for decades of market behavior.
Except now, stocks are not going up, and neither are USTBonds.

US stocks slid on May 7th as a tepid response
to aUSGovt bond auction
raised fears about public finances. Bank stocks also succumbed to profit-taking,
a day after leaked results from so-called Stress Tests suggested that most US banks
were healthier than previously thought, which in itself is a total fabrication. They need $75 billion, or maybe 10x
that amount in reality. Poor demand for USGovt debt
could raise the cost of capital and interfere with a USEconomic recovery. USTreasury prices
have dropped, sending both 10-year and 30-year USTreasury Bond
yield to its highest since November. Joe Saluzzi at Themis Trading in New
Jersey said, “The auction is big news because now it is showing that
maybe the Chinese do not want our bonds. If the cost of capital for the United
States becomes more expensive, then the recession
is going to take that much longer to get out of.” Or else the integrity
of the USTBonds is besmirched from publicity
from failure to deliver bonds by dealers. Or else the $trillion mountain of USTBonds to sell in the next year finally
gave investors a smack in the head for a wakeup call. Or else foreign investors
are realizing that a Treasury default is in the making. The debt auction
on that May day sold $14 billion in 30-year bonds
at 4.288% with a 2.14 bid/cover ratio. Rick Santelli of CNBC from the Chicago commodity pits did not mince words, as he said “Put a tail
on it, because this one was a dog.” He believed the bidders were uncertain
about buyback behavior, and more auctions coming soon, given the enormous USGovt debt
to finance. Perhaps bidders expect imminent price inflation, something
the clueless cast of economists and hacks at the White House suggest (at
last correct about something). One should note that the United
Kingdom and Germany have each suffered failed auctions, with
bids less than offered bonds. However, the USFed is
notorious in using JPMorgan to secretly submit bids so as to avoid such
embarrassment. The British and Germans are not as developed in deception.

The rally seen in commodity related stocks will undercut and potentially
scuttle any USEconomic recovery, as costs rise
broadly. One big source of available funds for commodity stock purchase
is USTreasurys, which might be dumped. A rally
in commodities will harm any economic recovery because it will mean higher
prices for both industry and households. The two biggest cost categories
in the USEconomy are energy and borrowed money.

A significant point deserves heavy mention. After rising steadily in
recent weeks, yields on USTreasuries last week finally climbed above the levels at
which they were trading before the Federal Reserve announced the monetized
purchase of US debt in mid-March. The entire benefit of the USFed bid has been erased, in a gigantic BACKFIRE. This is
shocking! The responsibility of the USFed to
balance the record setting amount of new debt securities the USGovt must
sell will result in supply pressure which tends to raise interest rates.
Yields on 10-year USTreasury have been trading
well above 3.0% in the last two weeks, compared with a low of 2.54% on
March 18th just after the USFed announcement.
That historic day, the USFed revealed purchase
of $300 billion in USTBonds and $750 in USAgency Mortgage
Bonds, an open monetization admission. The 30-year US Treasury Bond yield
hit 4.3%, above the 3.8% level before ‘Quantitative Easing’ was introduced
in mid-March. Carl Lantz is interest rate strategist at Credit Suisse.
He said, “It is all about the market’s testing of the Fed’s resolve
to keep yields low. The markets are waiting to see whether the Fed will
keep surprising them in ways that could push yields lower.”

The grandiose USTreasury purchase plan announced
at the March Federal Open Market Committee meeting marked the first time
in decades that the USFed had committed to buy
long-term US debt.
My forecast is for the amount to increase, especially if pressure on yields
continues to rise. Once begun, such a debased policy must continue, since
they are feeding a bubble and must buy larger chunks of debt beyond the
recent amounts. At the same time, the USFed and USDept Treasury will feel increasingly isolated, and be recognized
as isolated by foreign creditors. That should spell trouble for the USDollar exchange
rates, whose vulnerability is clear from a technical breakdown. The large
initial positive impact of the monetization decision in March has been
totally eliminated and removed, due to many factors which include concerns
over the scale of the debt issuance needed to fund massive US fiscal
stimulus and bank bail-out programs. The debt issuance will grow out of
control. The USTreasury Bond monolith had
become a monolith, destined to break. This is not an idle threat for USTreasury default.

David Walker, former director of the Govt Accountability
Office, continues to warn that the USGovt risks
losing its AAA credit rating. Until this year, ballooning healthcare
and social security costs were the source of great risk, which now is amplified
tremendously. He said, “Signs are abound that we are in even worse shape
now, and that confidence in America’s ability to gain
control of its finances is eroding.” Further adding to the strain on USGovt finances
will be the protection for municipal bonds. The House Financial Services
Committee is prepared to take up legislation this week that would establish aUSGovt backstop for all municipal bonds and their insurance.
This would establish another massive expansion of the federal guarantees,
with certain enormous funds to flow after failures. They plan to duplicate
after the Fannie Mae model (hardly successful). Fox Business reports it
would, “Create a liquidity facility through the Federal Reserve to purchase
municipal bonds, much like what the Federal Reserve does with mortgage-backed
and federal government bonds. Form a temporary federal government program
to reinsure municipal bond insurers. Almost all municipalities buy bond
insurance because it boosts their credit ratings.” Conclude the credit
rating is at big risk!

◄$$$ JUNK BOND BLITZ SIGNALS SPECULATIVE FEVER AGAIN $$$. The bank
leaders have learned nothing! Investors have learned nothing! Earlier this
month, BlackRock Chief Executive Laurence Fink
remarked on how low yields on USTreasurys were
driving investment funds towards riskier asset classes. Rallies earlier
this year in higher rated debt securities have been impressive, but are
more a signal of return to senseless risk-taking rather than market health.
Profits have been wrung out of the safer end of the market, pushing attention
to the risky end. Martin Fridson, who runs Fridson Investment Advisors, makes the case for speculative
money chasing yield again. We are right back to conditions in 2002
and 2003 that led to crisis. Rather than classifying bonds by rating in
his analysis, he grouped them according to trading gains. Under this method,
the highest returns have occurred with the most damaged bonds, which have
lost over half their original value, regardless of rating. Triple-C debt
has seen a giant inflow of funds targeting low prices rather than fundamental
credit characteristics. Bonds rated CCC and lower (qualifying as junk),
have gained 39% since March 9th, compared with 14% for those rated BB,
according to Merrill Lynch index data. The amount bondholders are recovering
after default is on the sharp decline, as loan funds are vanishing. Recovery
rates for defaulted senior unsecured bonds have averaged 9 cents per dollar
since December 1st, according to Goldman Sachs. Such low recovery is well
below the GSax forecast of 12.5% for recoveries
this year.

The months of March and April ignited the biggest junk rally since Michael
Milken helped to build the junk bond market in the 1980s. They rode the
wave created by phony accounting, an all-clear signal of sorts. Champagne
for celebration is surely premature. This is not a reassuring trend, since
we are in the middle of a powerful bond crisis. This is a repeat of the
conditions several years ago, when ultra-low USTreasury Bond
yields acted as a deterrent to prudent investment, and an encouragement
of ridiculous reckless risk. Progress is backwards, hardly a green shoots
trait. Investors in March sated their risk appetites amidst the falsely
heralded signs that the USEconomy may have bottomed.
The signs are pure propaganda. Investors betting that the worst was over
in junk bonds injected $1.79 billion into US high yield junk bond funds
in the four weeks ended April 29th, according to AMG Data. Companies have
sold $6.9 billion of sub-investment grade debt in the first week of May,
the most since the end of June 2008.

Moodys forecasts the global speculative
grade (aka ‘junk bond’) corporate bond default rate to hit a peak at
14.8% in 4Q2009, and later to come down toward 10.4% a year now.
So a storm awaits the risk junkies who embrace the junk bond insanity.
They expect the European speculative grade default rate is to peak at
19.2% later this year, even worse. The junk bond default rate rose to
8.3% globally in April from a revised level of 7.4% in March. In the
spring of 2008, the global junk default rate was at 1.7% only. A total
of 25 corporate debt issuers rated by Moodys defaulted
in April alone, lifting the default count to 112 bonds in this calendar
year. Compare that to only 22 defaults recorded in the first four months
of 2008, roughly a four-fold rise in defaults. Measured on a volume
basis, the global speculative grade bond default rate closed at 12.8%
in April, up from a revised 10.5% level in March. Last year at this time,
the global weighted default rate stood at 0.9% only. One can conclude
that very large high volume junk bonds are failing much worse. Their
distress index shows over half of the junk bond issuers as trading at
distressed levels, whereas a year ago the distress level was under 20%. The US-based speculative grade default rate
rose to 9.2% in April from a revised level of 8.0% in March. In the spring
of 2008, the US default
rate was at 2.0% only. The US is slightly worse than the rest of the world right now.

Charles Himmelberg is bond strategist at Goldman
Sachs. He said, “Investors felt like they had no choice but to pile
in [during recent rallies.] Otherwise they were going to get left behind
and under-perform their benchmarks. What has been surprising to me is how
aggressively the credit market was willing to pay for the still early signs
of a turning point.” Corporate bonds historically have priced in expected
peaks in default rates prematurely, with baseless optimism, said Thomas
Huggins, director of high yield bonds at Eaton Vance Mgmt. Since 1985,
four annual negative total returns for the market preceded a peak in the
default rate in the next year, according to Eaton Vance data. Huggins sees
conditions as more favorable, with better prospects to meet maturities
and at lower cost. Analysts at Morgan Stanley, Goldman Sachs, Barclays,
Bank of America, JPMorgan Chase, and Deutsche Bank have all cautioned that
the hubris may have become excessive. Gregory Peters of Morgan Stanley
said, “What investors are missing is the growth coming out of this very
hard recession is going to be the most tepid growth we have ever experienced.” That
is a soft way of saying the recession will become stubborn and not produce
much of any recovery. See the Bloomberg article (CLICK HERE).

USECONOMY DEFIES CLAIMS OF RECOVERY

◄$$$ ROUBINI REBUTTS GROWTH IN USECONOMY
$$$. In Roubini’s opinion, the United
States is still in a severe and deep and protracted
U-shaped recession that, unlike the forecast of the current consensus
economists, will not be over in Q3 of this year. Instead, it will continue
until the beginning of 2010 at least. Any light at the end of the tunnel
might come later rather than sooner, in 2010 rather than in the second
half of 2009. Significant downside risks remain. He does not share the
widespread optimism. While optimists speak about green shoots, plenty
of yellow weeds dominate the landscape (in his words). Second derivatives
are becoming positive, but they are not positive enough yet to suggest
that the recession will bottom out in Q3, as predicted by the consensus. The
toxic mess and damage caused by this leverage driven financial crisis
and economic recession, including a brutal shedding of employment that
shows no sign of letting up, will take much longer to truly heal the
financial markets, the financial institutions and the real economy.
(Above is Roubini’s summary, minimally edited.)

◄$$$ STRONG NEGATIVE GLOBAL TRENDS IN FALLING INCOME
$$$.The prevailing trends
in wages, disposable income, and the ability to service debt are all
growing worse in Japan, London, and the United
States. In Japan,
worker wages in March dropped at the steepest rate in over six years.
Their vast manufacturing sector has virtually eliminated overtime,
reduced pay scales, and attempted to avoid job cuts, in response to
a near collapse in exports that does not relent. Officially, monthly
wages, including overtime and bonuses, dropped 3.7% from a year ago. The
Labor Ministry called it the worst decline since July 2002. Overtime
payments fell by a huge 20.8%, as extra working hours were cut by 49.5%,
a record.

In the United Kingdom (England, Scotland, Wales, Northern
Ireland), the UKGovt reports
that wages fell at the fastest pace in 60 years. Bonuses
were broadly cut, and workers made broad concessions toward reduced
hours under the pressure of economic recession. The Office for
National Statistics reported average weekly earnings fell 5.8%, as
the private (business) sector earnings decline of 7.7% was offset
by a 3.2% rise in the public (govt) sector. Financial
sector bonuses declined by 58%. Michael Saunders is chief UK economist
at Citigroup in London.
He said, “We certainly have not seen anything like this in the
last 60 years, and probably not in peacetime since the 1930s. In
that sense it is much like everything else in the economy.”

US workers suffer blows to income, the evidence being anecdotal
in scattered fashion. Americans have lost significant wealth in stock
and pension funds, and in their home equity. An increasing number have
lost their jobs and homes altogether. In the spotlight are forced pay
cuts to Microsoft workers, to New York City hotel
workers, and various state government workers ranging from Maryland
to Indiana to California. According to a recent Washington Post-ABC News poll, nearly
35% of Americans say they or someone in their household has had work
hours or pay cut in the past few months. A 9% increase is seen in this
figure since a similar February poll. The Commerce Dept reports that
after inflation adjustment, worker wages fell from year 2000 until 2007
by $324 per week. Disposable income is defined as the amount of income
left to an individual after tax payments and other official withholdings
like health insurance. Household debt service payments are on the rise. In
2009, it now takes close to 14% of US disposable income to service household
debt. In the early 1990 decade, it took under 11%. If one factors
in property taxes and automobile lease payments, the numbers get worse.
The official household debt service ratio (DSR) is an estimate of the
ratio of debt payments to disposable personal income. Debt payments consist
of the estimated required payments on outstanding mortgage and consumer
debt. The financial obligations ratio adds automobile lease payments,
rental payments on tenant occupied property, homeowner insurance, and
property tax payments to the debt service ratio. It now takes 19% of
personal disposal income to meet household financial obligations. In
response to increased household pressures, watch for continued and escalating
failures to repay consumer debt, a burden that will largely be cast aside,
resulting in large scale additional losses to banks.

◄$$$ THE JOBS PICTURE RESEMBLES A STUBBORN
DEPRESSION $$$. The April Jobs Report from the Bureau of Labor Statistics
was perfectly executed, much as expected from my corner. It is a propaganda
weapon. The BLS estimated that 539k jobs were lost in April. They delineated
149k lost from manufacturing, 110k from construction, 122k from professional & business
services, and 47k from retail. The natural resource sector shed 11k jobs,
hardly an endorsement for the supposed economic drive for higher commodity
prices. The 73k lost jobs in temporary services serve as
an accurate signal on economic shift for the worse, a contradiction of
green shoots. A total of 72k new jobs were actually created in the government
sector, due to the new census hirings. The claimed (boasted) reduction in jobs lost, versus
the March loss, came from the convenient fictitious and always available
source of a statistical fabrication laboratory. The Birth-Death Model
claimed an additional 226k jobs were created in April within the small
business arena, a total fabrication farce. If this segment is not
experiencing near death throes, be shocked. This indefensible method
is a political tool based in fiction. So the announced April 539k jobs
loss was more like 765k jobs loss after putting back the fiction of B-D
Model and returning to reality. This method is finally receiving some
publicity, but not much from the major news networks, only the intrepid
internet sources. Furthermore, the trend is still negative in job loss
revisions. The BLS revised to worse the March job loss by 36k and
made worse the February job loss by 30k. So the bias is still toward
the favorable side on their estimates, as usual. Furthermore, the work
week is declining in total hour length, a contradiction to any argument
of improved conditions. Sorry, but the green shoots seem totally absent
in the following graph, especially after considering the statistical
fraud inherent to the cockeyed Birth-Death Model adjustment game.

The Birth-Death Model was forced to double up
its duty for April, since they pressed it for only 114k fictitious jobs
in March. Details for April expose the fiction further. The B-D Model
for April introduced 38k new jobs for construction, 65k new jobs for
professional business services, 76k new jobs for leisure & hospitality,
and 25k new jobs for education & health services. It is safe to say
that all four areas are shedding jobs at a rapid rate, except hotels
reportedly. See the Birth-Death Model shell game from the USGovt website, a true black eye of embarrassment to statistical
modeling backed by integrity (CLICK HERE). It might be a sophisticated
statistical model, called an autoregressive integrated moving average
(ARIMA-11) eleventh order time series, but that don’t impress me when
the small business climate is horrible and they are not hiring, period!
Such ARIMA models have their place, like in forecasting the 7-year sunspot
cycle, but surely NOT in forecasting small business job creation. Such
is a sham, with political motivation, laden with intentional distortions
to foment false optimism. They admit it misses economic turns, but they
distort using it anyway.

Check the total jobs losses after revisions
and after putting back the B-D Model adjustments. The gross unadjusted
April then March then February jobs loss totals are 765k, then 813k,
then 815k in order. No green shoots here, and no trend of improvement.
Furthermore, expect the April revision to be again around 30k additional
jobs lost, just like the last two months. Besides, March has been revised
worse now a total of two times. Expect April to be revised worse twice
also. Backward negative revisions mean either intentional falsification
for current digestion benefit, or basic wrong estimates that consistently
miss important trend shifts.

Alan Abelson of Barrons pitches
in, making reference to more astute comments from economist David Rosenberg
from Merrill Lynch. Abelson wrote, “For that matter, bad as it is,
539,000 [April job losses] does not do justice to the severity of the
payroll shrinkage. For one thing, it was puffed up by the 72,000 federal
census takers signed on by Uncle Sam. And for another, it includes
226,000 supposed jobs, or 60,000 properly adjusted, courtesy of what
David Rosenberg calls the ‘Alice-in-Wonderland Birth/Death Model.’ Ex
this pair of extraordinary items, he points out,the headline number would approach 670,000. In
one of his valedictory scribblings (David is
leaving Merrill Lynch and returning to the glories of his native Canada
and money management), he also notes that private sector employment sank
by 611,000 in April, and did so across a wide swath. He contends, ‘The
data just don’t square with the conventional wisdom permeating the
investment landscape.’ … Looking ahead, David scoffs at the idea
that the ‘jobs data are about to get better because the markets have
enjoyed a nice two-month rally.’ Among the reasons he is skeptical:
the still record low workweek, at 33.2 hours; the 66,000 downward revision to
the back data (which, he avers, tends to feed on itself); the 63,000
slide in temp-agency employment; and the high levels of both initial
and continuing jobless claims. All of which, he believes, foreshadows
a further 550,000 payroll plunge when the May data roll out early next
month. To David, as to us, the present buoyant mood on the Street is
obviously more the result of rose-colored glasses than of green shoots.”

◄$$$ THE UNEMPLOYMENT RATE CONTINUES TO
RISE $$$. The official sanitized and massaged jobless rate is at 8.9%
for April, after 8.5% for March. The month rise is steady, no green shoots.
It is actually the percentage of workers who receive state jobless insurance
benefits, so an intentional false label. The broader U-6 jobless rate
at 15.8% is more routinely being mentioned on the financial networks,
which also counts both discouraged workers no longer looking for jobs
and those who have settled for part-time jobs. The U-6 jobless rate
was 17.0% for March, so a slight improvement was seen. Expect that in
the next several months, the broader U-6 will surpass the 20% level and
might reach 25%, which was reached during the Great Depression. It bears
watching, since it reflects the true unemployment.

The totals on state jobless claims remain over
600k per week. The more important statistic from that data is continuing
claims. They are rising faster than the new claim applications. Notice
the shocking rise in the continuing jobless claims in the chart, which
now have hit 6.351 million, and still rising by 80k in one week. The
continuing jobless claims totals now have exceeded the 2003 peak, the
1991 peak, and the 1982 peak. In other words, it is higher than all
previous important post-war recessions. The chart looks odd since the
colors were inverted to save your black printer ink. The jobless claims
present a curve ball to interpret. In the week of April 25th, a
hefty 631k new jobless claims were registered. In the week of
May 2nd, a hefty 601k new jobless claims were logged. Another trampled
green shoot! The rise in continuing claims is a bad economic signal.
It means people are failing to find jobs at a faster pace than new jobless
workers enter the claims office, your best current indicator for unemployment!

◄$$$ CHALLENGER JOB CUTS IMPROVE, BUT DETROIT
PAIN COMES $$$. For the fourth consecutive month, the Challenger Grey & Christmas
large company job cut statistic has fallen. In April, the total such
job cuts were 132,590 which was 12% less than March, the lowest since
October last year. The peak was over 241k job cuts in January 2009. Although
the near-term trend is down, the April count is 47% higher than for April
last year. Also, the count for the first four months of 2009 is 145%
above the count for the same period in 2008. So far in 2009, the total
job cuts total 711,100 at large firms, which is staggering. Some analysts
believe January was packed in an unusual fashion. The CGC large site
job cuts might take a significant rise in coming months if either General
Motors or Chrysler go bust.

◄$$$ GDP DECLINE HINTS OF DEPRESSION $$$.
It seems when the USEconomy announced a second
straight absolutely horrible quarter for performance, it is so bad that
one cannot imagine the next quarter being equally bad. That is exactly
what happened, after the January propaganda blasted after the intensely
bad final quarter of 2008. The United
States is mired in the worst slump in 50 years.
Recall that in mid-2007, USFed Chairman Bernanke
said that the subprime mortgage mess would not spread to the real economy.
How could it not? It was the tip of the mortgage iceberg, which was the
visible side of an insolvent US banking system. The USEconomy plunged in 1Q2009, with the Gross Domestic Product
declining by an estimated 6.1% in annualized. This came after a 6.3%
decline in 4Q2008, the previous quarter. The GDP has now fallen in three
consecutive quarters, an event not witnessed in 34 years, since Q3 in
1974 through Q1 of 1975. Therein lies the hint
of economic deterioration, perhaps disintegration, that does not qualify
for the term recession. The good sign comes from the Price for Consumer
Expenditures price index excluding food and energy. The PCE fell 1.0%,
after decreasing by 4.9% in 4Q2008. Demand is catching up to supply,
except that supply is reducing sharply. Fears of deflation are easing.

International trade did not hurt the USEconomic growth
statistic; GDP was reduced by 0.15% only. Be clear to know that it not
as perverse as possible. In 1Q2009, US exports plunged 23.6% and imports
decreased 17.5%, hardly a solid environment!!! The GDP in Q1 would have
fallen more if not for improvement in trade. Exports fell, but imports
fell even more. Big damage is done for future growth prospects in the
next statistic. Business spending in Q1 dived 37.9%. Investment
in structures went down 44.2%. Equipment & software outlays decreased
33.8% also. Overall, businesses outlays in Q4 for 4Q2008 retreated 21.7%,
thus investment is worsening. Someone should tell the knucklehead analysts
and talking heads in government and the financial networks. This is the
opposite of a green shoot. The purchase of durable goods rose 9.4% in
the first quarter, but that is a statistical anomaly, since it decreased
a staggering 22.1% from October through December. Businesses were frozen
in shock last autumn, as credit was impossible. The growth statistics
for Q2 will be lousy again. Note the GDP from Shadow Govt Statistics,
which calculates growth versus one year ago, rather than quarterly. The
actual recession is 3% worse than the official statistics. That means
the USEconomic recession might be near 10% in decline.

Two positive elements lie on the economic landscape,
but they must be properly interpreted. Consumer spending climbed at a
2.2% annual pace in Q1, the most in two years. It accounts for about
70% of the economy, which is seen incorrectly as positive by the misled
pundits and hack analysts. Wrong! People need to save more in order to
help exit the recession. Consumption is NOT the avenue for exiting
ANY economic recession EVER, a fact the horrendous cast of US economists
seem incapable of EVER learning. THE PATH TO EXIT RECESSION IS SAVING
AND CAPITAL INVESTMENT, WHICH PRODUCES JOBS!!! Handouts and easy
credit do not facilitate exit from recession. Capital formation and job
creation do, from new businesses. Without nest eggs of savings, no recovery
is sustainable. Furthermore, the so-called retail growth is compared
to the end of 2008, after a shock occurred that
sent consumer spending way down. Consumer purchases dropped at an average
4.1% rate in the last half of 2008, the biggest slide since 1980. Overall,
consumer spending in Q1 contributed a positive 1.50% to GDP, after pulling
GDP down by 2.99% in Q4. Secondly, since mid-March, the USDept Treasury
and USFed have worked to purchase $750 billion in USAgency Mortgage Bonds. They have begun that initiative.
The total commitment in Agency Bond purchases might be $1450 billion,
but that benefit reaching the public is very much not evident. The benefit
goes to bankers to unload their impaired mortgage bonds from their asset
base, from damaged portfolios. The rates for mortgages and car loans
are down, to be sure. However, far fewer people are qualifying for such
loans as banks impose very strict lending standards. Refinanced loans
are on the rise, along with foreclosures, which means many under-water
loans are defaulting, then foreclosing still.

◄$$$ WRONG PERSPECTIVE & DIRECTION OF USGOVT STIMULUS
$$$. Here is an example of
absolute rubbish by USGovt officials. Christina Romer is the White House chief economist, working under Lawrence
Summers. She said, “Most people are saying we could bottom out in
the second half of the year, maybe in the third quarter, and then see
positive growth again. We are certainly looking for some positive news
towards the end of the year.” She is guessing and has no idea what
is happening, let alone the death of the US banking
industry. Household insolvency is growing worse, as home values still
decline, and job losses mount. The good news Romer refers
to is for the USEconomy to be no worse from
one quarter to the next. Stagnation calls for smaller declines on a
quarterly basis. The business sector reduced inventory stockpiles at
a $103.7 billion annual rate in Q1, the biggest drop since records
began in 1947. Excluding the minus 2.79% adjustment from the GDP calculation,
the USEconomy would have contracted at a
3.4% pace. Companies cut total spending, including equipment, software
and construction projects, at a record 38% annual pace. That signals
reduced business activity in the next few quarters. Without savings
and capital investment, jobs will continue to be shed, for the simple
reason that business activity will decline. An office not built, a
plant not built, simply results in no new jobs. Residential construction
also decreased at a 38% pace in Q1, the most since 1980, thereby reducing
overall GDP by 1.36% in Q1. That is a good thing, since housing inventory
must come down. But housing inventory is not coming down enough, due
to unstoppable foreclosures.

Much optimism is based upon President Obama’s
$787 billion Stimulus Plan, signed into law in February. It includes
increases in spending on infrastructure projects and a reduction in taxes.
In all, 22% of funds were allocated to tax cuts, the rest to projects.
The projects seem minimal, like $25 billion for highway projects over
the next 120 days. Less than 6% of the stimulus money approved for such
projects is intended for new construction, whereas 76% will be used to
repave and widen roads. However, the list of projects
feature wastes like $9 billion for a high-speed train between
Orange County California (Disneyland) and Las
Vegas Nevada. How about the same train built instead
between Philadelphia Pennsylvania,
through New Jersey, connecting to New
York City is the most traveled corridor inside the United States!?!? The spending on infrastructure
is one of the biggest phony stories told about the new Obama Admin, as
it is mostly talk of next generation energy and cars, small project commitments,
and more pork waste. See a webpage for ongoing monitor of USGovt infrastructure projects from Stimulus Watch (CLICK HERE). The Washington Post has a more
comprehensive list of spending and tax cuts (CLICK HERE).
Extraordinarily little will create or revitalize ailing US industries, resulting
in massive continuous job expansion.

Former Fed Chairman Paul Volcker, one of Obama’s
top economic advisers, said the USEconomy is functioning only “by the grace of government
intervention.” The opposite might be true. The US banking system is receiving
gigantic welfare checks on ruined bond redemptions, while the USGovt has
slashed spending at a 3.9% pace generally, the most since 1995. Big
cutbacks in defense spending are a good thing, but at the same time the
biggest decrease in state and local government outlays since 1981 were
ordered. That is not USGovt grace! This
ensures that jobs will be cut broadly at the local level, as services
will continue to be cut. One can expect that reductions in police, fire,
city office, and garbage collection will make cities more INHABITABLE
and more HOSTILE and riper for CRIME. They will resort to corruption
and theft, under pressure.

USGovt officials
who utter idiotic statements about economic growth in the immediate future
appear unable to read the news, or follow developments of their own making.
Recent announcements by companies including General Motors and Chrysler
indicate the economy will shrink again in the current quarter. GM plans
to idle 13 US assembly
plants for multiple weeks to cut production by 190 thousand vehicles
from May through July. Their inventory of unsold cars is filling countless
entire fields. Sales in its US home
market fell 49% this year through March, with similar sales declines
for all carmakers including Toyota. USGovt officials
point to confidence statistics more than tangible statistics based in
reality of the marketplace. See the Bloomberg article (CLICK HERE).

◄$$$ INVENTORY RATIOS DICTATE THE TREND
$$$. March wholesale inventories came down by 1.6% after coming down
1.7% in February. Many regard this positive news, since factories are
expected to be forced to replenish their supply stock, hire people, and
ramp up production. The reductions were 0.7% in January and 1.5% in December. However,
the key is not inventory, but rather inventory to sales ratio. Sales
are falling apparently faster than inventories. The Institute for Supply
Mgmt asks purchasing managers to gauge customer inventories. Its inventory
index rose in March and has been above 50 for the past eight months,
which means surplus still. That indicates purchasing managers still
think inventories for their customers are too high. That suggests sales
shelves do NOT need to be replenished, not yet. If
consumer spending fails to surge soon on a true economic rebound, factories
will not feel compelled to ramp up production and work toward replenishment
of warehouses and shelf space. This is a formula for sluggish
economic growth, not green shoots.

The potential silver lining in the 1Q2009 economic
growth story was stated to be the reduced inventory levels, but that
is a wrong conclusion, as sales have slowed greatly. The contraction
persisted even though lower energy costs permeated the entire USEconomy,
from gasoline to fertilizer to heating oil and industrial inputs. This
is a very poor response to energy price stimulus. US industrial production has declined for five
consecutive months into March. Over the past 12 months, industrial output
has fallen an incredible 13% almost. A 10% output decline is the criterion
for a depression! Capacity utilization by industries receded to 69.3%,
a historical low since records began in 1967. A normal level is between
80% and 85%. Extremely low demand is the problem. The new consensus is
that the USEconomic recovery will be very weak,
when it arrives. Aggressive monetary policy will take time to work. My
firm belief is that one or two quarters might show less hostile economic
decline, and then steep additional declines will come later this year
and next year. The USGovt stimulus is misdirected, geared
for bankers and NOT the economy.

◄$$$ IDLE SHIPPING INDICATES GLOBAL SLUGGISHNESS
$$$. Based upon the number of inactive oil tankers, commodity vessels,
and car carriers sitting at anchor, world trade is relatively unchanged
since the end of last year. No green shoots here. The chart below displays
the proportion of the global fleet sitting at anchor, using combined
figures from Lloyd’s Register-Fairplay and
gathered indications from ship captains. Ships carry about 90% of world trade, according to The Round Table of Intl Shipping Assns.
Andreas Vergottis is research director at Tufton Oceanic, the world’s largest shipping hedge fund firm.
He said, “There is more lingering and idling and waiting to find business.
[Anchoring] is a manifestation of slack.” Not only is trade on a
severe decline, but the global fleet continues to expand. Ship construction
continues, in the effort to maintain jobs, just like home construction.
Shippers are coping by accepting smaller cargoes and slowing their speed
so as to conserve fuel. Vergottis concludes
that a 30% oversupply exists in container ships, 20% in oil tankers,
and around 15% in coal & iron-ore carriers. Excesses are expected
to worsen due to the shipping fleet expansion. See the sluggish chart,
with no signs of improvement of idle shipping vessels.

A GLIMPSE AT HOUSING & MORTGAGE STRAINS

◄$$$ HOUSING PRICES REMAIN THE
ALBATROSS $$$. The USEconomy grew atop the housing
bubble from 2002 to 2006 in bizarre distorted imbalanced fashion. It will
continue to decline from the extraordinary extreme drag from the housing
decline, now in its third year. What took it up will drag it down, simply
stated. The Case Shiller housing index has recorded
annual declines in both the 10-city and 20-city price indexes around 18.5%
for February. The National Assn of Realtors last week announced that US home prices fell the most on record
in 1Q2009 versus a year ago. The decline was led by California
and Florida, as banks ramped
up sales of foreclosed properties. That process is NOWHERE complete. The
median price fell 14% to $169k for homes. Prices actually dropped in 134
of 152 metropolitan areas, with the deepest declines seen in Cape Coral-Fort
Myers in Florida, and the San Francisco and San
Jose areas of California. Prepare to witness monumental additional bank losses from
foreclosures, as home prices combine with job losses to force a persistent
national tragedy of foreclosures.

The April data on foreclosure filings in the US set a record for the second consecutive month
as banks accelerated home seizures from delinquent borrowers. A total
of 342,038 properties received a default or auction notice or were seized
last month, according to RealtyTrac. One
in 374 households was subject to a filing, the worst monthly rate since
they began their tracking reports in 2005. Nicolas Retsinas is
director of housing studies at Harvard University.
He said, “What you are seeing is the inevitable result of severe job
losses. Until we stem the job losses, we can expect to see continuing
foreclosures.”Foreclosure filings actually rose by 32% in 1Q2009
from Q1 a year ago. Filings were little changed from March as some
states delayed seizures, thus a temporary stall. After the Cramdown Law
was defeated, a fresh avalanche of foreclosures is certain. Ten states
accounted for three quarters of all foreclosures in April, with California leading the nation again. See the Bloomberg article (CLICK HERE).

◄$$$ CRAMDOWN LAW REJECTION MEANS
MORE FORECLOSURES $$$. The banks can lose money on home loans from a bankruptcy
court decision by a judge, or they can lose money from the foreclosure
process. The bank and mortgage industry has decided to take its chances
with the housing market, which is in chronic decline. Banks are not permitting
their REO properties to be placed in inventory for sale, being careful
not to suddenly crash prices. In doing so, they maintain a near permanent
excess inventory atop the market’s official inventory. Prices will continue
to descend for at least another year. Two years ago, my forecast was for
a seemingly endless housing decline. We have it! Bankers are caught in
the middle, bleeding quarter after quarter.

The US Senate rejected (by 51 to 45) the Helping Families Save Their Homes
Act (aka Cramdown Law). The bankers felt proud,
but are lined up for unspeakable continuous losses anyway. The
number of homeowners at risk of losing their homes to foreclosure stands
at over eight million, compared to two million two years ago. A
national tragedy continues. Interests of bankers have prevailed, but it
is a Pyrrhic victory for bankers, who have won a battle but are mortally
wounded in the war. This problem might have no solution! Sponsors are disappointed,
seeing the plight of homeowners. Opponents fail to comprehend the destroyed
housing market, with huge ongoing future losses. An unintended consequence
suspected if the Cramdown Bill had passed was
higher mortgage rates. However, this in my view is a straw dog argument,
since banks will have to recover losses from the costly foreclosure process
instead. At issue also is a solution that does not saddle solution costs
to the USGovt, again. At risk in this entire
battle would be trust and confidence in contract law and credit markets.

Bankers celebrate a minor victory, but must endure wave after new wave
of foreclosures. With the new bankruptcy law provision rejected, people
will next default voluntarily in droves, and banks will force the foreclosure
process more vigorously. Both will be losers. The housing crisis and mortgage
debacle in my view will accelerate, or at least continue its relentless
pace. The free market will decide on the bank losses. Banks will soon realize
their inventory of REO properties will zoom higher, thus creating a nightmare
unmanageable problem. To be sure, homeowners will lose their homes. Attention
will return to USGovt programs designed to assist
home loans. To date, they are merely adjustments, rather than modifications. The
interest rate is reset (often fixed), fines and late fees are loaded into
new loan balances, loans are restarted with some forgiveness, BUT LOAN
BALANCES REMAIN THE SAME. Simply stated, an under-water home loan remains
under-water, meaning loan balances remain below the home market value.
No bank will refinance a home loan with notable negative equity. By admission,
a surprise to me, banks and USGovt officials
admit that the existing modification aid programs are inadequate, and do
not attempt to really modify loans. They only restart them with rising
adjustable rates removed, wrapped in the misguided dream that the restarted
debt will be properly serviced. The chart shows clearly that modification
attempts are a grotesque failure, with a different series shown for different
vintages. Some call this a revolving door.

◄$$$ HIGH END PROPERTY ACTS LIKE SUBPRIME
NOW $$$. The housing mortgage market has uniformly broad damage. The
wealthy are defaulting on their home mortgages just like subprime loan
borrowers. The other big area of recent damage has been Option ARMs,
which will not be covered this month. Then there are second mortgages.
Billion$ in second mortgages are being destroyed each month, as first
mortgages they sit behind enter the foreclosure process, and are sometimes
actively ignored. The $1 trillion in second mortgages held mostly by
the nation’s largest banks have essentially transformed (downgraded)
into unsecured loans, since values have fallen and negative equity has
soared in the states they dominate. The Washington Mutual (JPMorgan Chase)
mortgage foreclosure machine has fired up, after the moratoriums ended.
Lastly, IndyMac serves as a good indicator
on the mortgage ruin parade, since they attempt to extract maximum salvage
value now that they are in private hands. They give an ominous signal,
according to Mark Hanson (aka Mr Mortgage). IndyMac already in the first four months of 2009 has reached
90% of the total loan defaults they suffered for all of 2008.

The finish of the California
moratorium has left the door open for a staggering jump in April and
May foreclosures. Focus on the high end here. Two years ago in the Hat
Trick Letter, my analysis loudly proclaimed that a full-blown credit
market and mortgage finance debacle was beginning, in fact an absolute
bond contagion. We have it! The wealthy are increasingly becoming trapped
by the same issue facing the poorest subprime homeowners. They are unable
to sell or refinance without losing money, as home prices continue to
fall and destroy home equity. RealtyTracprovides reliable tracking data. The
number of US homes valued at more than $729,750 entering the foreclosure
process jumped 127% during the first 10 weeks of this year, compared
to the same period of 2008. The foreclosure rate for this category increased
to 2.83% this year through March 10 from 2.21% in the same 10 weeks of
2008. That dollar figure is the new limit for jumbo loans, to be
honored by conforming Freddie Mac loans. California
is worst affected by luxury home foreclosures. More than 1500 borrowers
with properties in the state that once sold for more than $1 million
defaulted on their mortgages in February, said Mark Hanson, managing
director of the Field Check Group. See the Hanson website for excellent
information and analysis (CLICK HERE).

Jumbo loans, currently over $417k in most regions,
slowed in 4Q2008 to only $11 billion in new loan origination. That is
only 4% of the mortgage market, the lowest quarterly figure since data
has been tracked in 1990. So Jumbo loans are drying up, but their failures
are gradually becoming an important factor in bank losses. About $500
billion of prime jumbo mortgages are packaged into securitized bonds,
according to FTN Financial. Projections for losses on such mortgages
could reach 10% because of increasing defaults, almost doubling previous
estimates. See the forecasts by JPMorgan Chase analysts John Sim and AbhishekMistry in New York
from February. The Homeowner Affordability & Stability Plan by the
Obama Admin has no provision to help high end borrowers with jumbo mortgages.
The program focuses on shoring up conforming home loans eligible to be
bought by the bloated acidic duo, Fannie Mae & Freddie Mac. The hidden
motive is to keep the F&F turnover, with the hope that their solvency
might be restored from prudent loan servicing.

◄$$$ THE GROWING PLAGUE OF NEGATIVE EQUITY
HOME LOANS $$$. A loan with a balance higher than the home value is called
underwater, upside down, or with negative equity. The underwater ratio
is growing steadily at a national level, more evidence of anything but
stability. No green shoots here. More homeowners are stuck in insolvency,
as 21.8% were underwater in 1Q2009, real estate data service Zillow.com
said in a report last week. That dreaded figure has grown, up from
17.6% in 4Q2008, and 14.3% in 3Q2008. THAT IS NOT A SLOW GROWTH IN THE
RATIO, BUT A VERY FAST ONE!!! One in five Americans with a mortgage has
less than zero equity! By the end of 2010, one in three Americans might
qualify for the shameful distinction. The impact to household spending
patterns is immediate and pronounced. The hidden impact to bank lending
is clear also; they stop lending. See the Bloomberg article (CLICK HERE).
Let it be said a final time: NO GREEN SHOOTS HERE
!!!